Heads of terms are basically, a document which sets out all of the terms of a commercial transaction that are agreed in principle between all of the parties. The RICS 2020 Lease Code makes mandatory requirements for the Landlord to disclose and explain your Heads of Terms.
There will usually have been some discussions and negotiations between the parties before the heads of terms are drawn up.
Although heads of terms are not usually legally binding, it’s important to state this specifically in the heads of terms to avoid misunderstandings. If it is not expressly mentioned, then the heads of terms could be taken as being legally binding.
Although usually not legally binding, they often create some moral obligations on the parties and they encourage both the landlord and tenant to carefully consider each term to be agreed.
Why use heads of terms?
The idea of agreeing these terms at the beginning is to avoid further delays or professional fees later on.
If there is an issue that needs to be negotiated that cannot be resolved within the HoT negotiations it allows both parties to call off the transaction at an early stage.
What should be included?
This will vary dependant on the size and nature of the transaction.
The landlord, agent or tenant can draw up the HoT
Generally, heads of terms should always contain a minimum of the following information:
If you are not represented by a professional surveyor the landlord should explain this to you in detail what terms have changed from your previous lease, this is now mandatory according to the RICS. However we recommend that you obtain your own independent professional advice and protect yourselves!
- Property details
- Type of Lease – Contracted out or Protected by Landlord & Tenants Act 1954
- Use class & permitted use
- Costs
- Any conditions to the contract – eg. surveys, planning permissions, works
- Rent review terms & dates
- Tenant name & address
- Landlord name & address
- Any professional advisors/ agents
- The rent
- VAT
- Service Charges
- Utilities
- Deposit
- Term of Lease
- Break Clauses
- Assignment/subletting provisions
- Timescales – any deadlines to complete the transaction