What is a lease and why are Heads of Terms so important?
Real Estate Partner John Leasure kicks off our Complete Guide to Leases series, breaking down the fundamentals of leases and providing an overview of what we should be thinking about right from the start of a lease transaction.
What exactly are leases?
Leases are legal agreements between two parties, a tenant and a landlord, which allow the tenant to occupy a specified space for a set period, in exchange for some form of rent, usually cash. You can have leases of commercial spaces, high street shops, distribution warehouses, office floors, or residential premises such as a flat or a house.
Where should you start if you want to take out a lease?
The first thing you should do is draw up a detailed set of Heads of Terms. This is a document that outlines the key commercial terms which are agreed between the landlord and the tenant and allows the lawyers to draw up the necessary legal papers. Heads of Terms are fundamental to the process and should be checked carefully.
What kind of terms would usually be included?
The Heads of Terms will include obvious terms, such as specifying the space to be let to the tenant, the annual rent which the tenant will pay, and the duration of the lease. It is usual for either the landlord or the tenant, or perhaps both, to have appointed property agents. The agents will assist in advising their clients on purely commercial matters, such as whether the annual rent is appropriate, and at open market levels.
However, the Heads of Terms should also include other, more legal terms. These include details of the service charge and insurance rents the tenant should pay to the landlord, what the landlord’s repairing obligations should be, and the terms on which the tenant may carry out alterations to the premises, or transfer the lease to a third party. Each of these terms can have the effect of protecting a party and/or limiting their liability for costs if properly agreed. However, if they are ignored at this early stage, a client can find themselves exposed further down the line.
What should a landlord or a tenant do if they are unsure if the terms they are agreeing to are suitable?
You should appoint a solicitor from the beginning of the transaction and involve them early on. It is not unusual for parties to think lawyers should only be involved at the end of the commercial negotiations, and believe they can minimise legal costs by delaying instructing solicitors.
Unfortunately, the reverse is often true and by only involving solicitors at the end of negotiating a set of Heads of Terms, a client can lose valuable legal input. Getting this early on can often help speed up the deal and reduce overall costs. A good solicitor will be able to provide a client with a steer on which terms are appropriate given the nature of the premises and its proposed use and having this information on day one can be invaluable.
Once the Heads of Terms are agreed upon, the lawyers will begin the process of negotiating the formal legal documents. While the party solicitors will take the lead on this, it is important that the client knows and understands the points being negotiated.
If you would like further information about leases or Heads of Terms, please contact John Leasure. John is a Partner in our Real Estate team and regularly advises on a variety of real estate transactions where he acts for both landlords and tenants.