“Heads of Terms” is a document setting out the fundamental agreement between a landlord and a tenant and is the precursor to the lease itself. At this point, they are not legally binding but serve as a crucial stepping stone towards finalising the lease. Many estate agents will send you the Heads of Terms and say ‘please sign here’, implying that it is a fait accompli, but in fact this is your opportunity to make changes. This is your opportunity to negotiate and create something that works for you.
The reality is: If It’s important to you and your business but it’s not in the Heads of Terms, it won’t be in the lease. And if it’s not in the lease, you can’t rely on it later on! Whatever you do, don’t accept ‘oh yes that’s fine’ verbally when you discuss additional requests. If it’s not documented in black and white, essentially it doesn’t exist.
Having supported hundreds of businesses to get the right premises on the right commercial terms, what I’ve observed time after time is that you – the business owner – so often don’t know what you don’t know about commercial leases. After all, there is a lot to know! As you won’t necessarily realise what’s wrong, what you can change, or what’s missing, I’ve created this blog post to give you a grounding in the basics and draw attention to some of the options you have available to you to negotiate on your Commercial Lease. Good luck!
This might seem obvious at first glance: this is the address of the property. However, one of the most common flashpoints can be the postcode. Whether you ask the rating authority, post office and land registry, you could have up to 3 different postcodes! It pays to check that the correct one is on your lease agreement.
Also under the heading of Property, it’s important here to check floor area vs usable space. These might differ depending on the pitch of your building’s roof, for example, where floor space under a low roof becomes unusable. Check whether the property has been measured according to the RICS code and this will give you a clue. Also ensure the service charge is similarly accurate if it is based on floor area – this could be a potential bust-up point later down the line!
In my experience, parking on industrial estates is always problematic and a potential flash point. You need to check the extent of the property that is for your exclusive use and any “shared” areas. Check if the area or industrial estate has double yellow lines, for example. How will you protect or enforce your own parking? One of the landlord’s obligations is “Quiet enjoyment” – which means you should be able to use the property for the use intended. Where you have repeat offenders, say, parking on your premises, you can ask your landlord and it would be their responsibility to take action.
This might also sound obvious, but there’s more to it. Will this tenant be a ltd company, a group of people or an individual? If you are in a partnership, what happens if you end the working relationship with your partner? If it’s a limited company, it needs to have a track record of at least 3 years of accounts of net profits 3 times the previous years (the institutional test) for the landlord to agree. If this is not available, they might ask for secondary security eg a rent deposit or a personal guarantee. A rent deposit is a separate deed that says the tenant must pay X months’ rent + VAT. Once the tenant can pass the institutional test, the deposit needs to be paid back to the tenant – otherwise, it might be held for the full term of the lease.
Who is your landlord? You need to know if it’s an individual, a partnership, or a limited company. Are they local and if so, will you get the chance to meet them? How invested are they in your business? Do they own a portfolio of businesses? Or is it a hedge fund or financial institution that has outsourced the management to a massive service company? In that case, you likely won’t see the same agent twice! There are pros and cons to each: a large institutional landlord will be clear on regulations and compliance, but private individuals might not know about all the rules and regulationss e.g. gas safety test. A large institutional landlord might be less open to negotiation but a private individual might meet with you and there might be a chance to build an ongoing relationship.
How long should a commercial premises lease be? Rather than asking the agent how long the lease is, ask yourself how long your lease should be to best support your business. The truth is: the landlord is always going to go for the longest they can get away with, but as a business owner you are in a position to offer a proposal of a lease length that works for you. You might also not realise as standard you have Security of Tenure from The 1954 Landlord & Tenant Act. This means a landlord may not tip a tenant out without proper reasons, such as breach of lease, continual non-payment of rent etc. You can contract out of the 1954 Landlord & Tenant Act, but itneeds to be in black and white and you’ll need to sign a declaration that you have read and understood. If you take a short lease this is not as important – so you can always concede this as a bargaining chip!
What is the landlord’s financial position and main motivation? They might try to incentivise you – e.g. by offering rising rent or a rent-free period. The important thing for you to know is why. For example, if the landlord has just spent a lot of money on the building, cash flow will be important. As the tenant you will pick up insurance, business rates and service charges – so even during a rent-free period, there is a significant financial benefit to the cash-strapped landlord.
A break clause enables one or other or sometimes both parties to bring a lease to an end, usually on a specific date and subject to quite often stringent conditions, one of which is a written notice. The trips and traps in a break clause are the subject of an entire blog post. But, ask yourself or your business plan, do you actually need a break clause? Are you using it as an emergency parachute because you’re not confident in your business plan? Or are you planning to use it wisely, i.e. to coincide with a contract ending in your business? Consider what you are giving away elsewhere in the Heads of Terms, to have that break option you are unlikely to use.
This often catches people out as it is least well understood. The first line typically says the tenant shall keep the property in ‘good tenantable repair.’ This may sound innocuous but the bit that is missing is the word ‘put’, and in law, it is implicit. After all, you can’t keep something in good and tenantable repair unless it is that way in the first place! The way around this is to insist on a ‘Schedule of Condition’ before you move in, so you are only liable to hand the property back in the condition it is in, when you take it, and as set out in your lease.
Ask to see the last 3 years’ premiums so you get an idea of what your financial commitment is going to look like. You also need to know what might be excluded e.g. things like flooding. Have a look at the building and consider what’s out of the ordinary. Remember: the landlord won’t want to take on responsibility for anything not included in insurance and will put that back on you.
How much has it been for the last 3 years? What does it cover and not cover? Ensure the service charge is administered in accordance with the RICS code for service charges. Transparency is key here, for example what counts as repairs and maintenance vs what is development (for which the landlord should be responsible). This becomes more complex for a multi-occupancy building – you’ll need to check whether there is a sinking fund for major items.
Ensure you have the usual rights to sublet and assign – this is a key lever to ensure future flexibility for your business. I see far too many leases with no alienation rights at all and this, in most cases, is a red line for me advising a business owner. An alienation clause in a commercial lease allows you to sublet the premises in the future, potentially giving you the flexibility to find another tenant to take on your existing premises and relocate to somewhere new that better suits your needs. However, you remain liable as tenant of the ‘Head Lease’. What people miss is the difference between subletting and assigning. In assignment, the original tenant transfers their entire remaining interest in the lease to a new tenant, substantially lowering but not removing completely, their liability.
The principle here is that you will have an obligation to comply with current statutory regulations and those that come into force in the future. For example, if in 3 years the fire regulationss change such that your internal doors comply, you’ll be obligated to replace them and bear the cost. However, if the doors don’t comply the day before the lease is signed, it’s on the landlord. But if it’s not picked up beforehand, it’s on you as the building is in breach of regulations AND your lease. The answer? Ensure that the building complies with all current regulations before the lease is signed.
Ensure you have your landlord’s consent to signage on the exterior of the building, especially if it’s important to the marketing and awareness of your business that your brand is highly visible.
Consent to alter
Do you need to make any alterations to the premises? If so you will be required to provide a schedule of works to gain your Landlord’s consent. Once the lease has begun, you will be paying for consent.
This should say that each party is responsible for its own legal and associated costs. It’s up to you to ensure it’s clear if the expectation is different. You might be surprised, but I see all sorts of variations on this.
Agreement for lease
You can request an ‘Agreement for Lease’ to be put in place so that any alterations can be planned for and prepared. This is a preliminary document used in commercial property transactions, which serves as a crucial stepping stone before entering into a formal lease agreement.
Ideally, the date should be as soon as satisfactory planning consent is determined. A watch out here: the date of the lease is not the same as the lease commencement date.
This is usually six months following completion and should include a summary of the expected total rent in Year 1. This might differ from the lease commencement date depending on what is agreed, so ensure your dates are all accurate and as expected.
Having read this blog you should have a good understanding of the Heads of Terms. In theory, you could now carry out your commercial property search and lease negotiation yourself. However, it’s important to remember the agent in any property transaction is acting on behalf of the landlord – and they do this sort of thing every day so they know the Heads of Terms on a lease like the back of their hands. So, they won’t be telling you anything that might prejudice the outcome for them.
Ideally, you need experience and understanding equal to theirs, to level the playing field and get the best outcome for your business. Whether it’s an upcoming rent review, extending a property lease, or just a feeling that your existing premises are holding your business back, my knowledge, experience, and services can help you secure the right commercial premises on the right commercial terms. To find out more, get in touch for a free informal chat.