Do the 'perfect' lease heads of terms exist? What is their purpose in the evolving market and which important terms need careful consideration?

Do the 'perfect' lease heads of terms exist? What is their purpose in the evolving market and which important terms need careful consideration?

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Author: Nick Dalgleish

Seasoned operators in the real estate market will know that if heads of terms lack sufficient information a deal may suffer delay, frustration and rising legal costs

When negotiating the terms of a deal, parties should consider a whole raft of issues and agree the detail of terms which are then sent to lawyers who will draft around them. All parties concerned will prefer that terms are clear from the outset and are not negotiated further down the line. Unfortunately this can happen if important issues are left unaddressed.

What is relevant to any deal will depend on its complexity and the particular requirements of a client but certain issues are fundamental.

At the most basic level the parties' identities and the property details need to be full and clear. Company numbers should be given as it is these and not the name of a party which truly identifies it. Lawyers are unlikely to have specific knowledge of a property and so a brochure should be annexed to the agreed terms if available.

No matter which party to a transaction is represented the following issues need consideration:

  • Use - does the existing use match the planning use for the property? Will an application need to be made for a change of use? Will the transaction be conditional on a satisfactory planning permission?
  • repair - will a lease be on a full repairing and insuring basis or will repair be limited by a schedule of condition? Consider terms relating to environmental liability, inherent defects and warranties
  • alienation - what rights the tenant will have? A landlord will prefer to keep its agreed tenant throughout the lease term and may want to restrict alienation. In contrast a tenant will prefer to maintain flexibility. What conditions on assignment and underletting are absolute requirements for your client?
  • alterations - which works will require consent and which will not? A tenant is likely to want to do minor works without consent and so avoid the cost and delay of applying to its landlord. What reinstatement obligations should be imposed or agreed?
  • landlord's works - does the landlord need to do works prior to lease commencement? Does this suggest the need for an agreement for lease? Will the grant of the lease be conditional? Should there be an agreed long-stop date? Does there need to be a practical completion procedure
  • service charge - what proportion will the tenant pay? Will there be a cap or a sinking fund? What services will the landlord provide?
  • rent review - is there to be a fixed rent, a stepped rent, a review by reference to RPI or market value? How is the hypothetical term to be valued and are there any unusual assumptions or disregards which need to be considered? Surveyors are the experts in this area

The real estate market is ever evolving. As it does so, some heads of terms become more topical and contentious, whilst others become widely acceptable. The following need to be addressed at the earliest possible opportunity:

  • code for leasing business premises - if a landlord client will not accept the recommendations set out in the code, the heads of terms should not state that they will as this will cause argument and delay during the drafting stage
  • uninsured risks - if a lease is silent as to who should reinstate a property following damage or destruction by an uninsured risk, the tenant may be liable for the cost of repair and reinstatement. In a short lease, this risk is disproportionate for a tenant. Heads should state whether damage by uninsured risks will be dealt with in the same way as insured risks
  • break conditions - it is vital for a tenant to be able to exercise its break, but failure to comply with conditions will leave an attempt to break ineffective. It has become more widely accepted for a tenant to be required only to pay the main rent up to the break date and to give up occupation free from any third party interests
  • authorised guarantee agreement on lease assignment - should the landlord have an absolute right to require an AGA as a condition of assignment or should it be subject to a reasonableness test?

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

About the Author

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Nicholas Dalgleish

Solicitor

03700 86 8217

Nick is a solicitor in the real estate team, and has experience working on a variety of landlord & tenant matters, including retail property, office space and industrial site lettings.He also has experience in the telecommunications infrastructure market and works for a number of clients in relation to their property investment portfolios comprising site lettings to telecoms operators.

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