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Heads of Terms checklist

There are some basics that should always be included in the Heads of Terms. Click on each option for more information and a checklist for your negotiations:

 

Length of the lease ('the term')

In the current property market, leases are generally granted for three or five years for offices – but could be for as little as a year, on one hand, or for 20 years or more on the other. You should not take out a lease for longer than the period for which you have guaranteed funding, unless it has break clauses.

Negotiation checklist

 

  • length of lease meets your needs

 

The rent

The landlord will initially put forward a high rent figure – so negotiate. You could negotiate to pay a lower rent, or for a discounted or rent-free period at the start of the lease. It is common practice to negotiate a rent free period whilst you are doing any refurbishment work on the premises before you can move in (you should, however, expect to pay service charges during a rent-free period).

Look at rents on similar properties in the area to see if you are being offered a fair deal. You can ask a local agent or commercial property surveyor to give you a view on a reasonable market rent for the property. Be clear on what the rent quoted to you includes. Is it just the rent? Or are some services included too? You can then make sure that you are comparing with other premises on a like for like basis.

Negotiation checklist

 

  • hammer down initial rent figure quoted
  • secure discounted or rent-free period at start of lease

 

What the premises can be used for

It is essential to check that the premises can be used for the activities you have in mind. The activities allowed in the premises depend on the 'use class' it is allocated under planning permission, and the uses permitted by the landlord. Office premises in England and Wales are allocated the use class B1 (follow this link to the Planning Portal website for a full list of use classes) and in Scotland use class 2 or 4. If in doubt about the use class of the premises, phone or visit your local Council's planning department, rather than relying on the landlord or his agent.

If you want to apply for planning permission to change the use of the premises, say from a shop to an office, you will need the landlord's permission. Planning permission for a change of use involves time, effort and expense, so you should try to get an informal opinion from the council before you start. Most councils have a 'Duty Planning Officer' to give this sort of advice without the need for an appointment.

If you will not consider the premises unless you can change the use, then you must agree this in the Heads of Terms. Landlords are often reluctant to agree this and usually prefer to deal with people who don't need to apply for planning permission.

Some charities have a specific specialised use which may be obscure in the general market so the lease needs to be flexible to allow change of use should you wish to assign or sub-let. 

Negotiation checklist

 

  • your activities fall within the permitted use of the building
  • weigh up the pros and cons of the flexibility of the premises

 

Rent review dates and the terms of the review

Leases may include dates at which the landlord can review the rent. The best outcome is to secure a deal with no rent reviews. You can then be sure that your rent will not go up, and budget accordingly. The longer your lease is, the more likely it is that the landlord will require provision for rent reviews.

Landlords will generally seek a rent review every three to five years, and will want to review the rent in line with the market at the time. Reviewing rent on an 'upwards only' basis is common. This means that, if the market rises, so does your rent. But, if the market falls, your rent stays the same. Agreeing reviews on an 'upwards/downwards' basis is preferable – but practically unknown.

Less common options are agreeing rent reviews in advance, or rent reviews linked to the Retail Price Index (RPI). RPI basis for reviewing the rent is a useful tool in the short term (in the long term inflation may be too out of alignment with RPI) particularly for unusual uses where market evidence is scarce.  It saves time and cost of negotiation and is fairly certain in allowing financial planning. 

You will need to take a view on the best rent review deal for you. It's basically a gamble, as no-one knows what the state of the property market will be in five years time. Fixed or index linked increases will be best – unless the market falls.

You should also check that the lease enables you to challenge any new rent proposed by the landlord.  There will usually be a procedure in the lease by which any dispute can be referred to an independent chartered surveyor.

Negotiation checklist

 

  • no rent review
  • five-year rent review cycle agreed
  • procedure for resolving disputes

 

Your obligations to maintain and repair the property

The landlord will require you to take some responsibility for repairing and maintaining the property. There are two main types of 'repairing obligations' you are likely to come across:

1. Full repairing and insuring (FRI)

A Full Repairing and Insuring lease (FRI) is the most onerous as it requires the tenant to pay for the insurance of the premises and all repairs and maintenance of the interior and exterior of the property. A FRI lease is high -risk, as you could find yourself paying out for large items such as a new roof, windows, lift or boiler. You should definitely avoid a FRI deal on a short lease as you shouldn’t be responsible for major repairs that you will only benefit from for a short time.  FRI lease on a property in poor condition would be a particularly bad deal.

Remember that the condition of the premises at the start of the lease is usually irrelevant.  With a FRI lease there is an implied covenant for the tenant to PUT as well as KEEP the premises in good repair. 

2. Internal repair and decoration

With an internal repair and decoration lease you should only have to repair and maintain the interior of the property. The landlord should be responsible for structural and external repair of the property. Items such as the windows and window frames are often deemed to be part of the interior. You may pay a higher rent for an internal repair and decoration-only lease, but this can be worthwhile if it reduces your liabilities substantially. Alternatively, the landlord may want to recover the cost of repairing and insuring the exterior and structure by way of a service charge.  So although the tenant will not be directly responsible for such matters, he will be required to contribute towards the landlord's costs.

With both FRI and internal repair and decoration leases, the tenant can be obliged to leave the premises in better condition than when you took them on. To avoid this, you should negotiate to include a 'schedule of condition'. This is a written and photographic record of the condition of the premises prepared by a building surveyor. Along with appropriate wording in the lease, this can be used to ensure that you are not required to leave the premises in a better state than you found them.

Whatever you negotiate in terms of repairing obligations, your exact responsibilities will depend on the detailed wording of the lease.

Negotiation checklist

 

  • internal repair and decoration only or fair wear and tear secured
  • schedule of condition incorporated

 

Your options to sublet and assign the lease

It is common that the tenant can assign (transfer) the lease to another tenant, or sublet the premises. This gives you the option of moving out of the premises before the end of the lease, without then having to pay rent on the empty property. Other than on a short lease (one year) you should not take a lease without an option to assign or sublet. The landlord's consent will be required before any assignment or underletting.

Assignments always apply to the whole of the premises, but it is sometimes possible to agree an option to sublet part of the premises. If, for instance, you take two floors of a property, you should negotiate to be able to sublet either one or both floors.

If your charity is unique in its aims (eg City farm, music for a specific client group) there may be almost no-one else who would fit into the permitted user description so you need to negotiate a “get out”. 

Negotiation checklist

 

  • option to assign included
  • option to sublet the whole and/or part of the premises included

 

Break clauses

A break clause is a right to terminate the lease early on one or more specified dates. There is no standard arrangement for break clauses, so it is up to you to negotiate break clauses appropriate to your organisation. You can ask for one or more break clauses – or even a rolling break clause where you have the option to break at any point with a certain notice period. Key points in your business plan, and your funding cycle, when the organisation might grow (or shrink) will be good points to negotiate a break clause.

Leases with break clauses may attract a higher rent. However, you may decide that this is a worthwhile investment.

Look at the dates of your break clauses relative to your rent review dates. You should negotiate a break clause about one month before a rent review so that you avoid paying a higher, and potentially unaffordable rent, before you leave. This will also strengthen your hand in rent review negotiations.

Negotiation checklist

 

  • break clause(s) included
  • break clause occurs before rent review

Security of tenure

Under the Landlord and Tenant Act 1954, business tenancies have 'security of tenure'. This means that, except under certain circumstances, you will have the right to a new lease when your current lease ends. The landlord has the right to charge a market rent on the new lease, but most other terms are generally the same.

Landlords frequently ask tenants to 'contract out'. This means that when the lease comes to an end the tenant does not have the right to apply for a new lease and the tenant may have to vacate. There is a process for contracting out which must be followed. This will be dealt with by your solicitor. In Scotland. with one small exception, provided that there is correct service of a notice, a commercial lease terminates at the date of termination contained in the lease.

Negotiation checklist

 

  • (in England and Wales) lease covered by Landlord and Tenant Act 1954

 

Guarantors

A guarantor may be required to agree to meet all of the tenant's obligations if the tenant defaults. The guarantor accepts the legal liabilities of the tenant, effectively acting as the landlord's insurance policy, and can be sued if he does not comply.

It is fairly common for a landlord to seek a guarantor. Directors or trustees may be asked to act as guarantors for the organisation, where the organisation is the tenant. However, the role of guarantor is an onerous one and should not be entered into lightly. It is best to avoid providing a guarantor. A better option is to provide a rent deposit. If the Trustees have to provide a guarantee deposit, unless the landlord is of undoubted financial strength the money should be held in a special deposit account which is ring fenced, or with an agent who keeps deposits in similar accounts.

Negotiation checklist

 

  • no guarantor provided for lease

 

Rent deposits

A rent deposit is a sum of money paid to the landlord at the start of a lease, which the landlord will draw on if the tenant defaults on rent or any other obligation under the lease. A rent deposit is preferable to providing a guarantor. The deposit is typically equivalent to three to six months rent – but you should negotiate.

The details of a rent deposit should be contained in a Rent Deposit Deed, a separate document that accompanies the lease. This will be drafted by the landlord's solicitor and should be reviewed by your solicitor. You are entitled to the interest on a rent deposit held by your landlord.

You can negotiate for a time limited rent deposit, whereby the landlord refunds part or all of the deposit once you have proven yourself to be a responsible tenant – say after two or three years.

Negotiation checklist

 

  • no rent deposit or guarantor provided
  • rent deposit agreed in place of guarantor
  • time limited rent deposit agreed

 

Payment of legal costs

The landlord may ask you to pay his legal fees for drawing up the lease. You should agree that each party pays their own legal costs.

Negotiation checklist

  • each party pays their own legal costs

The service charge and what it includes

A service charge is a fee paid to the landlord (in addition to the rent) to reimburse him for the costs associated with the operation, maintenance and repair of the building. This can include servicing communal areas eg. cleaning, lighting, heating, water supply, furnishing and providing fire extinguishers, and servicing the whole building, eg. maintenance of lifts, window cleaning and maintenance and repair of the building structure.  You should only agree to pay a fair and reasonable proportion of the landlord's costs so that you will have the right to challenge items which you feel you should not have to pay.

You could try to negotiate a capped service charge so that you know in advance the maximum you will pay. This has the added advantage of avoiding the need for a building survey as, even if the landlord encounters problems with the building, he cannot pass on additional costs to you.

Negotiation checklist

  • a fair and reasonable proportion of the landlord's costs
  • capped service charge agreed

Making alterations to a property

Alterations to the premises will require the consent of the landlord in the form of a licence for alterations. You will pay the landlord's costs for issuing this licence – and may also be required to pay for the cost of the landlord's surveyor. If you discuss this with your landlord up front, you may be able to negotiate around these costs. If you seek a licence for alterations later, you will undoubtedly pay the full costs.

Bear in mind that, when you move out, the landlord may require you to remove alterations you have made to the property, and return the premises to their original state. You should negotiate to avoid this if possible.

Negotiation checklist

  • alterations you wish to make are permitted
  • costs related to alterations negotiated down
  • requirements to remove alterations and reinstate premises minimised

 

Access

The landlord will normally restrict access to 'normal working hours' but this is subject to interpretation. If, for example, you require regular evening or weekend access, you should make this clear and agree it in the Heads of Terms.

Negotiation checklist

  • hours of access suit your needs 

 

Other

As well as these core elements, there will be things that are 'must-haves' for you. For instance, rights which you will require over, or to use, other parts of the building, such as parking facilities or cycle racks.  You should make sure that these are discussed and recorded in the Heads of Terms.