Most property lawyers secretly enjoy the "drop" into the inbox of fresh Heads of Terms for lease transactions.
Heads of Terms are the absolute "bread and butter" to the property industry. Done correctly, and everyone is a winner. But as landlord and tenant requirements have evolved, pro forma Heads of Terms have largely stayed the same. Preparation of Heads of Terms are, properly, the domain of the surveyors and an accurate and fully negotiated set of Heads covering all of the key points will be worth its weight in gold to both landlords and tenants. No one is better placed to advise on rental levels, building condition and the local letting market than a surveyor who is regularly transacting in that area.
This article is intended to look (from a lawyer's perspective) at what might be included in an "ideal" set of surveyor prepared Heads of Terms, to make legal negotiations as straightforward as possible.
First off, the fundamentals – Address and Parties. Seems obvious but knowing exactly what is being let and who your tenant is, does help.
Including the company number of the tenant would be a help as the name might change but the number never does.
Specify if there is a Tenant Guarantor and if so, determine whether that Guarantor is a Foreign Company or not. A landlord will want to know that the Guarantor has authority to give that guarantee and that the Guarantee is capable of being enforced in Scotland. Very quickly we find ourselves on a path towards foreign opinion letters. Not a deal breaker but can have significant cost implications in terms of legal fees.
In terms of the property address, having a plan attached to Heads does make a big difference. In the majority of cases the surveyor will have visited the property but the lawyer will (at best) have driven past.
Does the property share a car park or have a designated number of spaces? Is there any space in a multi let building which tenants are able to use or book and, if so, how will that be paid for?
The duration of the lease is generally straightforward. We just need to know if there is a break option, is it tenant only, does the tenant have to pay anything to break the lease and are there any tenant incentives if they don’t exercise the break?
The same applies to options to extend – is it absolutely clear when and how the option to extend can be exercised?
The rental terms are generally not controversial. It's largely just a case of specifying how much and how often. Rent incentives have definitely evolved over recent years - the "vanilla" offering of three months rent free from date of entry seems a distant memory.
Rent review is still one part of the draft lease where lawyers will generally defer to surveyors. If the rent is index linked, is there a "cap or a collar" to apply?
The repairing obligations are an aspect of Heads negotiations where surveyors have earned their stripes over the last few years. In the past it felt like every lease, regardless of duration or condition of the building on Day 1, was taken on a "full repairing" basis. Tenants are now better advised – or more prepared to pay for advice – and (most) landlords are more realistic about what liabilities they can reasonably pin on tenants.
For Heads of Terms, the repairing "menu" generally applies. Pick one of the following:
- Full repairing
- Full repairing but subject to a schedule of condition
- Internal repairing only
- Internal repairing but subject to a schedule of condition
- Internal decoration only
- Rent inclusive of repair costs
If it's multi let and the landlord looks after the common parts and re-charges via service charge, is there any cap on service charge?
It is good to know who is taking responsibility for the preparation and cost of any Schedule of Condition.
Linked to repairs, particularly for brand new buildings, is establishing whether there are tenant collateral warranties available.
For alterations, alienation and insurance, unless there is anything specific about the premises or the covenant of the tenant, could Heads of Terms simply state that "PSG Model Commercial Lease wording will apply"?
It's not as if the average tenant rushes to check their lease before making internal alterations….
Finally, is there anything special about this property or the tenant which needs to be taken account of in the lease itself? If so, mentioning it at Heads of Terms stage might prove to be a lifesaver if either party wants to rely on it at a future date. And of course, at the risk of stating the obvious, always ensure that the Heads are "subject to contract" so that the parties don't unwittingly find themselves bound in to a legal relationship before lawyers are even instructed!
If you have any queries on this, please contact Tracey Menzies or your usual Brodies contact.
