Avoid Costly Mistakes: Key factors for Tenants to consider in Leasehold Heads of Terms

In many leasehold transactions, the legal adviser only becomes involved once the Tenant and the Landlord have already agreed on the Heads of Terms for the transaction, usually with the aid of an agent. Heads of Terms, once finalised, form the basis of any leasehold transaction and cover key lease provisions such as length of term, break dates, rent review provisions and repairing obligations.

Although not legally binding (in most cases), once Heads of Terms are agreed  it can then be very difficult for a tenant to try to vary the terms if their legal adviser suggests that there might be better options to consider, or if key points have been left out of the document. A full and thoroughly considered set of Heads of Terms can save both parties time and money in the long run and  the more that can be agreed upfront means less negotiation and re-drafting of the lease clauses during the transaction.

Key Considerations for Tenants

The following are some of the key considerations tenants may overlook at the Heads of Terms stage, but which should be considered as early as possible in order to facilitate a smooth transaction later down the line:

• Fit Out Works:
  • An agreement for lease may be required if either the Landlord or the tenant care carrying out works ahead of lease completion. In the case of Landlord’s works the practical completion of those works will trigger lease completion.
  • If you want early access to complete your own fit out works ahead of lease completion then timings for that will need to be carefully negotiated and joint management of the CDM regulations considered. You should also be aware that if the lease is never completed the Landlord will usually insist that the tenant’s works are removed and made good.
  • the Landlord is also likely to require that you enter into a licence to alter to evidence the Landlord’s consent to any Tenant fit-out works (even if they take place before the lease is granted).

Discussing any fit-out works you need to undertake, and any Landlord’s works, at an early stage can help you establish a clear timeline of the earliest likely date you can take full occupation of the lease. It will also help you understand what documents the Landlord will require at the outset of the transaction, which can help you manage costs. There can also be Stamp Duty Land Tax implications in respect of early occupation by tenants to carry out fitting out works depending on the drafting of the agreement for the lease, and careful advice should be sought on this point.

• Service Charge:
  • Have you seen a service charge budget and estimate? How will service charges be calculated? The most common way is by reference to the floor area of the premises you are taking, or being a fair and reasonable proportion of the whole service charge. However, early enquiries in relation to Service Charge might reveal any potentially large anticipated items of expenditure.
  • Some Landlords may be willing to offer a cap on the service charge, limiting the amount of the annual service charge or a cap on how much the service charge can increase per year.        

Establishing a clear idea of the likely service charges and how these will operate at the outset can ensure you have the opportunity to fully consider if these fit into your budget for the premises. Early discussions also provide the opportunity to negotiate a cap or the way the service charge is calculated for your premises.

• Break Clauses:

Break clauses can be extremely contentious so it is wise to think about these carefully at the heads of terms stage, including:

• Who can exercise the break? Landlord/Tenant/both?
• How many months’ notice must be given for the break?
• Will the break be conditional?

It is typical for conditions to be attached to a break clause, some can be fairly standard, but a condition like “Vacant Possession” can be extremely onerous. Non-compliance with a break condition can result in a break notice being invalid, even if served on time. You should therefore take legal advice before agreeing to any break conditions and ideally set out the key break clause terms at the heads of terms stage to avoid disputes later down the line.

• Rights Granted:

Do you require rights to access shared facilities or to use car parking? Are these exclusive rights to you, or on a first come first served basis?

On a viewing of the property, you may be shown amenities such as parking spaces, bicycle storage and EV charging units (to name a few). These may be common amenities available to all tenants on a site, or you may want to agree to specific rights to use specific amenities. Discussing exactly what rights you require at the heads of terms stage ensures it is clear from the outset what rights you are expecting as part of your lease alongside the actual occupation of the property. 

• Green Clauses
  • Will the lease include green clauses?
  • Has the Landlord/agent explained the extent of the green clauses to you?
  • Do the green clauses fit with your business interests?

Many Landlords are including green clauses in their leases to encourage and provide for sustainable business practices and better environmental performance of properties. Green clauses can range between light, medium and dark green, with dark green leases imposing stronger obligations to cooperate with sustainability objectives which can impose economic burdens on you as a tenant. Light green lease clauses  are usually contain less onerous obligations or may even be contained in a memorandum of understanding separate to the lease itself. You should establish the strength of the green clauses at the heads of terms stage as these can vary greatly, this will also give you the opportunity to negotiate the clauses to be in line with your own business interests and sustainability objectives.

Further Questions to consider

Should you be asking for a rent-free period? If the premises have been empty for some time or you have a strong tenant covenant you could see if the Landlord would grant you a rent-free period or contribution towards fitting out works.

Is the rent review clause right for you? Open market upwards only rent reviews are the most common, however, in the retail market turnover rent leases are more popular (this is where the Tenant only pays more rent if their own revenue increases). You could also consider asking for a “collar and cap” rent review which iswhere the rent will increase by a minimum percentage but will also be capped at a maximum percentage, helping you to budget your costs more effectively.

Is the lease flexible enough for your business to grow during the lease term? Restrictions on alterations are common, but if they are too restrictive you will not be able to adapt your space as your business grows. Alternatively, can you assign or sublet all or part of your property with the Landlord’s consent (such consent not to be unreasonably withheld or delayed)? Fairly drafted alienation clauses can give you more options if you outgrow your current space during the lease term.  

Is the repairing obligation fair? If you are taking on a full repairing lease then you should consider whether this should be limited by a schedule of condition (photos and text) to ensure that you are only responsible for reinstating the premises to the condition they were in when you took it on.

These are only some of the options for tenants to consider but at Prettys you can be confident that we will tailor our advice to your business and your premises.

Contact Us

If you would like further legal advice on Heads of Terms or any commercial leasehold transaction then please contact Jemima Lister at jlister@prettys.co.uk