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Mon 01 Sep 2014

Commercial Property Leases - what to consider when agreeing heads of terms?

Commercial Property Leases - what to consider when agreeing heads of terms?

It’s often the case that solicitors are provided with the agreed heads of terms when they receive instructions from their client or their client’s agent.

The problem here can be two-fold. Firstly, the ‘heads’ may not include all of the provisions which are required; and secondly, if the ‘heads’ are silent on certain issues then the solicitors can spend their time negotiating these points when it may have been easier to have agreed them at the outset. Consequently, the better position might be to consult your legal advisor at the time the heads of terms are drafted.

What I’ve tried to do below, is set-out some of the questions which are not always considered or actioned at the outset:

Premises:

If the lease is to be registered you’ll need land registry compliant plans which are to scale and contain a north point.

If the property being let is the ground floor of a building, is there any ground floor extension area as the landlord will want the tenant to be responsible for this sole roof area.

Term:

If this is an underlease you won’t be able to grant the lease for the same amount of time as the superior lease, it will need to be slightly shorter.

Break Right:

Is this to be personal to the tenant?

Is it to be conditional? Consider the current issue of vacant possession?

If the tenant exercises the break, will it be paying any compensation back to the landlord?

If the rent is paid upfront in advance, what is the position regarding apportionments and returning the overpaid rent back to the tenant when the break option is exercised?

Rent:

Will this be paid quarterly or monthly (consider a side letter to document this)?

Does the landlord require the rent to be paid by direct debit?

Is there a rent free period? If so, should this be staggered to give the landlord a revenue stream. If it’s a six month rent free period and the tenant is a new company there’s a chance it could go into administration or liquidation before any rent is payable.

Rent Review:

Does the landlord require a rent review at the end of the term?

What is the length of the hypothetical term? (The landlord’s surveyor will usually want to decide this depending on the current market conditions)

Repair:

Is there to be a schedule of condition to benefit the tenant?

The tenant may also wish to consider wording relating to latent defects and insured risks.

Is this a renewal lease? If yes, the landlord will want to make reference to any previous works or licences for alterations

Insurance:

What is the position regarding uninsured risks?

Alienation:

Will the tenant need a group sharing provision?

Will the tenant be permitted to share part. If so, is there a limit on how many times they can sublet or is there a permitted part? The landlord will usually require all sublettings to be excluded.

User:

The landlord will want to ensure here that it is the tenant’s responsibility to ensure that it has the correct planning permission for the user clause.

Consider permitted hours.

Remember to check the title to see if there are any restrictions on use which the landlord will need to incorporate here.

Alterations:

Does the tenant need the ability to carry out internal partitioning without the landlord’s consent?

Guarantee:

Does the landlord require a guarantor or rent deposit?

Is the rent deposit to be returned prior to the end of the term (i.e. a profits test)?

Security of Tenure:

It’s surprising how many times this is missed out from the heads of terms.

Rights

Do you need to reserve or grant any specific rights?

Does the tenant require parking? Is this on a first come first served basis?

Service Charge

Is there to be a cap? Ensure that the service charge cap has an expiry, otherwise it could be incorporated into any renewal lease. Wording in the heads of terms to read: ‘It is agreed that the service charge cap shall not be included in any renewal lease’ should be benefit the landlord here.

Is the service charge cap to be linked to RPI?

Signage

Does the tenant require any signage?

The landlord may wish to limit the size and location.

 

If you need any assistance with your heads of terms or setting up a model heads of terms, please contact James Goff at JPC Law.

We are further happy to assist you in negotiating you lease whether you are a landlord or a tenant.

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