What are Heads of Terms?
The purpose of HoTs is to record the principal points of a deal before the finer details and small print of a contract are drafted and negotiated by solicitors. HoTs are used in numerous different scenarios, but for the purpose of this blog I have chosen to refer to HoTs in the context of leasing. For the most part, surveyors negotiate the HoTs on behalf of clients, although solicitors may become involved in lengthy transactions or in instances where a client does not instruct a surveyor.
One example of a template for HoTs is that produced by The Property Standardisation Group (PSG) in conjunction with the Royal Institution of Chartered Surveyors (RICS) - relative to the Scottish version of the Small Business Retail Lease. This Model HoTs template is seven pages long, but it is a useful checklist of things to be considered. Some landlords and tenants have their own HoTs templates that are tailored to their business and/or to issues that they always seek to cover in a particular way. There is no one size fits all.
Basic HoTs points for a lease
HoTs for a new lease should, at minimum, set out the:
- parties ie landlord, tenant and any guarantor
- property to be let
- annual rent, and any provisions for it to be reviewed and
- duration.
For the parties, it is also useful to include the details of the solicitors involved, so that the respective solicitors can contact one another without pestering the surveyor or client for these details.
The property to be let might be a simple address or it may involve part of a larger property, in which case providing the solicitor with plans is helpful.
Rent might be a straightforward agreed annual rental figure for the whole duration (if the lease is relatively short) or there might be a review of the rent (usually still upwards only) at specified dates, whether to open market rent or based on RPI increases - or the whole or part of the rent might be a percentage of the turnover from the tenant's business at the property. The HoTs should also state any rent free period that is to apply.
As to duration, the HoTs should mention any break option that can be exercised by the landlord or tenant or both and any tenant option to extend the duration.
Additional HoTs issues for many leases
The four points above are essentially the minimum information needed to allow solicitors to draft a lease. However, to avoid unnecessary adjustment to an initial draft lease, it is best to provide instruction on many other elements.
The RICS HoTs template provides a helpful prompt for solicitors, surveyors, landlords and tenants about other aspects that should be considered during lease negotiation process such as:
- whether any works will be carried out by the landlord or tenant;
- details of insurance and repairing obligations upon the parties; and
- whether assignation or sub-letting will be permitted.
Many more issues will also arise in most leasing transactions.
Why have Heads of Terms?
Ask a client what they want from a transaction and often the answer is for it to be as quick and painless as possible. Well drafted HoTs help the involved professionals to deliver that result.
HoTs help to focus the minds of both the landlords and tenants, forcing them to address the key issues at the outset. They also clear up any points of confusion that may arise. People often leave a discussion with differing points of view as to what was agreed. Writing down the main points means that any misunderstandings in what was agreed can be identified and resolved before detailed drafting begins. It also helps as an aide memoir.
However, there are a few things that should be avoided. Firstly, it would be advisable to avoid making HoTs binding. Although they are rarely legally binding, the courts have been known to interpret them as such in instances where the parties' conduct suggests they have entered into a legal agreement. Secondly, during HoTs negotiation, parties should avoid spending too long on small details that solicitors can cover. It is likely that solicitors will have greater experience in negotiating the finer details and will be able to iron out these aspects quickly. Finally, it is important to ensure that HoTs are free from mistakes, omissions and loose wording as this will only cause confusion and lengthen the drafting process.
I scream, you scream, we all scream for HoTs…
HoTs are able to speed up transactions and provide all parties with a suitable outcome to the leasing process. Leases are binding contracts and they are the most significant financial commitment a business can make and solicitors and surveyors alike want to ensure the transaction runs as smoothly as possible.
In order to ensure that the parties are not left hot and bothered by the leasing process, HoTs should be thought through and well drafted so that rather than the client spending hours on the phone or in meetings with their solicitor or surveyor, everyone can be sitting in the park enjoying a 99 in the sun (that is if it decides to make an appearance this year)!
