Heads of Terms: What a Commercial Landlord Must Agree

Heads of terms set out the commercial deal before the lawyers draft the lease. Getting them right saves time and cost and avoids surprises, because the lease follows the heads.

What to include

• Parties and premises: who is taking what, including any guarantor.
• Term and break: length of lease, and any break clause.
• Rent, rent-free and reviews: the headline rent, any incentive, and the rent review pattern.
• Repairs: FRI or IRI, and any schedule of condition.
• Alienation: rights to assign or sublet.
• Use: the permitted use.
• 1954 Act: whether the lease is contracted out.
• Service charge and insurance: how costs are recovered.

Headline vs effective rent

Incentives such as rent-free periods and fit-out contributions reduce the effective rent below the headline figure. Agree these openly, because they affect both value and the comparables used at the next review.

Subject to contract

Heads of terms are normally marked subject to contract so they are not binding until the lease is signed. They are not usually drafted by a solicitor, but it pays to have yours sanity-check them before they go to lawyers, so nothing important is missed or conceded by accident.

Are heads of terms binding?

They are normally marked subject to contract, so they are not binding until the lease is signed, but the lease follows them closely.

What is the difference between headline and effective rent?

Incentives such as rent-free periods and fit-out contributions reduce the effective rent below the headline figure.