Key considerations for negotiating a commercial property lease in the UK: A comprehensive guide to heads of terms

When negotiating a commercial property lease in the UK, it is important to have a clear understanding of the key terms of the lease that have been agreed upon by the landlord and tenant before the lease is drafted. This is typically done through a document known as "heads of terms".

It is important to carefully read the heads of terms before they’re finally agreed, as this will form the basis on which the solicitors acting for the landlord and tenant agree the legal documents. Once the heads of terms are agreed, it’s often difficult to get either party to renegotiate any of the terms.

If insufficient detail is included in the heads of terms, or if important terms are missed, this can lead to unnecessary delay and cost as solicitors will then be required to consult their clients, and any agents involved, in order to negotiate and agree terms which could have been dealt with at the outset.

Here are some of the key points that should be addressed in the heads of terms for a commercial property lease in the UK:

1. PARTIES

Starting with the basics, the identity of the landlord and the tenant should be stated, include their registered address and company number if corporate entities.

 

2. PROPERTY

The address of the property and (if possible) reference to a lease plan or land registry title number should be given.  

 

3. RENT

The amount of rent to be paid, the frequency of payments, and any rent reviews should be clearly specified including the dates on which the rent reviews are to be undertaken and on what basis (i.e. upward only, open market review, retail price index review).

 

4. TERM

The length of the lease and any dates of any break clauses should be included. This will ensure that both parties are clear on the duration of the lease and the circumstances under which it can be terminated. A break clause should state who can exercise the break clause and the length of the notice that party needs to give in order to break the lease. Any conditions of a break clause should be included, however it is advisable to speak with your solicitor before agreeing any such conditions in the heads of terms.

 

5. REPAIR

Who will be responsible for the repairs and maintenance of the property should be covered. You will often see phrases like “FRI” lease (Full Repairing and Insuring lease) used which means (in relation to repair) that the tenant will be responsible for keeping the property in good repair and condition. Where a property is not in good repair and condition at the start of a lease, a tenant could negotiate limiting it’s repairing obligations by reference to a schedule of condition, which documents in photographs the condition of the property at the start of the lease and means the tenant is not required to put the property back into a better condition than is shown by the schedule of condition. If it is agreed that the repairing obligations on the tenant are going to be limited in anyway, this should be noted.

6. ALTERATIONS

The type of alterations that a tenant is permitted to make and whether the tenant is required to obtain the landlord's consent before making any changes should be confirmed.

Also, if the tenant intends to undertake a fit out of the property at the beginning of their lease the heads of terms should specify a timescale for the tenant to produce and send to the landlord detailed plans and specifications to be agreed for the fit out.

Delays in the provision and agreement of initial fit out plans for a property is arguably responsible for the largest number of delays on commercial lease transactions. 

 

7. ALIENATION

Whether the tenant can assign, underlet, share occupation and charge the property should be added. It is often useful to incorporate the conditions the tenant must meet in order to assign or underlet (e.g. on assignment will the outgoing tenant be required to guarantee the performance of the tenant covenants by way of an authorised guarantee agreement, or for both an underletting and assignment, will the tenant be allowed to underlet and assign only the whole of the property and not part?)

8. USE

What the property can (and cannot) be used for should be made clear. Also, it is possible to state in the heads of terms the hours in which a tenant can access the property. For example, most London office leases will allow 24/7 access and it is useful for the heads of terms to state this in order to clarify the expectations of both parties at the outset.

 

9. RIGHTS

This doesn’t need to specify all the rights which will be granted to the tenant or reserved by the Landlord under the lease, but should cover any which are essential for either the landlord or the tenant. Examples include the tenant’s rights to use bike racks, communal kitchenettes or parking spaces or to add signage to a communal signage board at a building. 

10. SERVICE CHARGES 

Whether or not the landlord will charge the tenant a service charge for the provision of services at the property or building in which the property is located is an essential point. It should be specified whether or not a service charge cap has been agreed, and if so, how much this is and whether or not that cap will increase on an annual (or any other) basis.

11. INSURANCE

It should specify who will be responsible for insuring the property and whether the tenant will pay for this insurance (or a fair proportion of the insurance) through an insurance rent.

12. GUARANTOR 

If the tenant is a new business or has a weak financial standing, the landlord may require a guarantor to provide additional security for the lease. The heads of terms should specify the identity of the guarantor and the length of the guarantee.

13. RENT DEPOSIT

It should confirm if a rent deposit is required to be provided, the amount of the deposit and the circumstances under which the deposit will be refunded.

14. SECURITY OF TENURE 

Under the Landlord and Tenant Act 1954, commercial tenants in England and Wales have the right to request a new lease at the end of their current lease (known as security of tenure), and the landlord can only oppose the new lease on certain specified grounds. A landlord will often look to contract out of security of tenure, which means the tenant waives their right to security of tenure. The heads of terms should state whether or not the tenant will benefit from security of tenure or not.

15. WAYLEAVES

If the tenant needs to install additional telecommunications equipment (i.e. internet or telephone lines) it is likely that a wayleave agreement will need to be entered into. If necessary, it should be stipulated in the heads of terms that the Landlord agrees to enter into a wayleave agreement to authorise the installation of any necessary telecommunications equipment.

16. CONSENTS

It’s often useful for the heads of terms to stipulate whether any consents will be needed to enter into the lease (i.e. superior landlord’s consent or lender’s consent) and who will be responsible for obtaining such consents.

17. CONDITIONS 

The heads of terms should confirm whether completion of the lease is conditional on any events taking place. Common examples of such conditions include a) completion of agreed Landlord’s works to the property; b) or the granting of a planning application to change the use of the property from its current use, to the tenant’s intended use. The conditions will usually be documented by way of an agreement for lease, which will stipulate that the lease is completed once the agreed conditions have been satisfied. A long stop date will also need to be agreed whereby the agreement can be terminated if the conditions have not been met by a certain date.

18. TIMESCALES 

It is also useful for (realistic) time scales to be agreed. This often helps focus the attention of the solicitors, agents and clients involved in the transaction. It is also helpful to stipulate that solicitors will have a call to agree any outstanding points after say three turns of the documents.

19. SOLICITORS 

Finally, the details of the solicitor who will be acting for both the landlord and tenant should be provided.

 

Although the heads of terms should mainly deal with the commercial terms of a lease, at Kingsley Napley we encourage clients to speak with us if they have any questions regarding the terms they’re agreeing to. Although a solicitor is not there to advise on the commercial merits of the terms in a lease, our market knowledge and experience can often help both tenants and landlords to: a) avoid agreeing unusual or onerous terms; and b) cover all necessary bases in order to facilitate the efficient agreement of the legal documents on the transaction.

In conclusion, the heads of terms for a commercial property lease in the UK should address a range of issues and by addressing these issues in advance, both parties can avoid confusion, potential disputes, additional costs and time delays when seeking to agree the legal documents and complete the lease.

About the authors

This blog was co-authored by Matthew Copeland and James Forster.

Matthew Copeland

Matthew is an Associate in our Real Estate team, bringing extensive experience in various aspects of commercial and residential real estate matters. His client portfolio includes large property investors, landlords, tenants, developers, lenders, pension trustees, PLCs, and entrepreneurs. Matthew's expertise spans lease negotiations, site acquisitions and disposals, portfolio sales and purchases, property auction transactions, portfolio management, secured lending, and complex agreements such as overage agreements, options, pre-emption rights, and conditional contracts. With his comprehensive knowledge and diverse skill set, Matthew offers valuable guidance and representation to clients in navigating the intricacies of real estate transactions.

James Forster, Director at Metric RE

James qualified as a Chartered Surveyor in 2016 and joined Metric RE following 4 years at BNP Paribas Real Estate where he gained experience in Corporate Real Estate and Tenant Representation and was also responsible for leading the flexible office team in London. He has advised large corporate organisations on flexible office deals and strategy and also fast growth technology businesses on the best office options to support future growth.

James is able to utilise his experience to advise clients across the spectrum of possible transactions available in the office market, whether that be on short term flexible space, managed transactions or long term conventional leases. He is particularly curious and passionate about technology and how this will continue to influence the real estate industry.