Commercial Lease Heads Of Terms (HOTs)

Heads of terms, which are alternatively referred to as memoranda of understanding, comprise the terms to be incorporated into the legal document and are a list of the items that the landlord and tenant have agreed upon prior to the issuance of the lease. They are also capable of handling any additional tenant-landlord agreements, including alterations and time constraints.

Legally, the heads of terms lack enforceability, given that both parties are not obligated to continue with the transaction until the legal instruments are formally executed. In spite of this, they are regarded as indicators of the parties’ intent to move forward with completion. In this article, Commercial Lease Heads Of Terms, we take a look at the process and mechanism involved.

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For a free initial discussion with a member of our New Enquiries Team, get in touch with us today. We are experienced in dealing with all the legal aspects of drafting commercial leases, and once instructed, we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you are on the best possible footing from the start and also avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.

Are heads of terms really necessary?

Although HOTs are not mandatory for a transaction, we advise devoting the time necessary to negotiate them prior to engaging the services of a solicitor for your commercial property transaction for a number of reasons.

One of the primary advantages for an individual or organisation is the potential for substantial legal expense savings in the long run. By negotiating the essential provisions prior to the engagement of solicitors or the start of drafting the lease, you circumvent the need for your solicitor to relay your instructions to the opposing party’s solicitor, who must subsequently obtain instructions. The solicitor may examine the HOTs and determine that the term in question has been negotiated, thereby obtaining permission to incorporate it into the preliminary lease agreement. This not only reduces the amount of correspondence for which you may be charged, but it can also substantially accelerate the transaction by eliminating the need for your lawyer to revert for information before drafting the lease.

HOTs can be negotiated in order to identify contentious issues that may necessitate the transaction’s termination at a later date, after costs have been incurred. This not only results in financial savings but also prevents the inconvenience and time wasted searching for an alternative property to lease that meets your business requirements.

When properly drafted, HOTs do not establish a legally enforceable contract, assuring the parties that they are not entering into contractual obligations prior to the engagement of their solicitor. Rather, they serve to provide direction and structure for the subsequent drafting of legal documents.

To prevent your HOTs from being considered legally enforceable, we advise that you specify that all intentions are “subject to contract.” Nevertheless, you will hopefully be working with an experienced commercial property agent who can provide assistance in negotiating the HOTs without establishing a legally enforceable contract. Your solicitor will be able to assist you in drafting HOTs if you have agreed to a private lease without the use of an agent. While this service will incur legal fees, it is likely that it will reduce the number of negotiations between the solicitors of both parties regarding the draught lease, thereby expediting the process and keeping costs to a minimum.

Negotiating Heads of Terms

It is the responsibility of both the tenant and the landlord to negotiate the terms in order to guarantee that the obligations mutually agreed upon are reasonable. Tenants ought to negotiate the heads of terms suggested by the agent in an effort to achieve a mutually beneficial agreement rather than accepting them as final.

Due to the fact that the heads of terms dictate the structure of the legal documents, they ought to be comprehensive in nature, encompassing the majority of the agreed-upon aspects in advance. The transaction can proceed more efficiently and quickly if the landlord and tenant are able to reach an agreement on a greater number of items at the outset. However, tenants should not agree to anything whose ramifications they do not completely understand.

What should be included in heads of terms?

• The landlord will request references and financial information pertaining to the tenant in order to ascertain their confidence in the tenant’s ability to remit the rent obligations throughout the term.
• Property information — the complete description of the property, as well as any additional rights the landlord grants the tenant, should be included.
• Commercial leases are typically executed at the prevailing “market rent” for a yearly payment that is due monthly or quarterly in advance. Rent may be due upon lease expiration, or the landlord may grant the tenant a rent-free period during which rent obligations commence at a later date.
• The Term refers to the duration for which the lease is intended to operate. The relevance of additional clauses, such as a break clause, may vary depending on the duration of the term. Typically, a short-term lease lasts between one and three years.
• Assignment and underletting: The tenant may be permitted by the landlord to assign or underlet the entire property, contingent upon the duration of the lease agreement. A headlease permits the tenant to transfer the lease to a third party, whereas an underlease permits another party to utilise the premises while the tenant retains liability for the property.
• Permitted Use: The tenant must be informed of the permitted use of the property through documentation of its use.
• The landlord must determine whether the tenant, themselves, or both may terminate the lease early by providing notice to the other party in accordance with the break clause. In the event that a break clause is present, the date and any prerequisites ought to be specified.
• Short-term leases are typically “excluded” from the statutory right to a new lease upon the expiration of the current lease, which compromises security of tenure. In the event that neither the landlord nor the tenant provides notice of termination at the conclusion of the lease, the lease shall remain in effect annually under the identical conditions (a practise referred to as tacit relocation) until proper notice is furnished.
• In the event that the landlord has reasonable grounds to doubt the tenant’s ability to pay the rent, he or she may demand a rent deposit in lieu of security. In that case, the payment amount ought to be specified in the heads of terms.

How we can help

We have a proven track record of helping clients deal with the process involved in drafting heads of terms and commercial leases. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/

How to Contact Our Corporate Solicitors

It is important for you to be well informed about the issues and possible implications of a commercial lease heads of terms. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.

To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

 

Authored by Ben Posted in Blog, News Tagged as

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