What Are Heads Of Terms In A Commercial Property Transaction?
Much like sales memorandums, that are used in residential property transactions, commercial property transactions involve what are known as heads of terms.
The heads of terms work, very much, in the same way that sales memorandums do, however, heads of terms allow for slightly more information. This is because, in some ways, commercial property matters are slightly more complex than residential matters. This is why it is important to ensure you have the expertise of MG Legal’s property conveyancing solicitors on board. Our team are simply the best at what we do, and can guide you, from start to finish, through the transaction with ease. See the comments of our previous clients for yourself, by following our reviews.
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So, what exactly are the heads of terms, and how do they assist your commercial property transaction?
The heads of terms are provided upon commencement of the transaction, in order to assist the parties involved. In some ways, they are the skeleton to the transaction, and set out the key points that have been agreed between the parties. This then allows their respective solicitors to draft and approve documentation, accordingly. Think of it as the heads of terms providing the bones, with your commercial property experts adding the flesh, and substance to the transaction.
The heads of terms note what, in the preliminary stages of the matter, the parties have agreed, and can include the following:
The full details of the parties, inclusive of their respective contact details.
Full details of the demised premises, i.e. the property, including the address and postcode.
The agreed term of the lease, i.e. five years from the date of commencement of the lease. This can also include whether there is any agreed option to break the lease, by way of a break clause.
The agreed rent. This is, often, split into yearly amounts. For example, a five-year lease has been agreed, each year will be listed with the amount of rent payable. This is, particularly, useful where rent payments fluctuate on a yearly basis.
VAT. To confirm whether this is payable, in accordance with the prevailing rate. The incoming party will be particularly interested in this, as it will confirm whether the rent payments listed are inclusive of the same, or whether VAT is payable, in addition. This can, of course, have significant effects on the amount payable, and would be an important item to be noted.
Confirmation as to whether there are to be any agreed rent-free periods.
Any additional specific arrangements, that the parties have agreed upon. For example, rates, decoration responsibility, alienation, service charge payments, legal costs etc.
Any conditions, to which the transaction is to be subject to. For example, this could relate to the use of the property and the relevant planning authority consent being provided for such use. The conditions can, of course, vary and will be unique to the transaction in hand. At MG Legal, our team of commercial property experts work on an extremely professional basis, but also pride ourselves on being friendly and approachable. This allows the early exchange of important information between our team and our clients, in order that we know what to look out for, from the outset, in this regard.
Any set timescales that may have been set out. Whilst it can be extremely difficult agree Completion dates in the early stages, as there are so many factors to consider, setting out projected time scales can be of use, in order that all parties are working towards the same time frames.
As you can see, the heads of terms can include a lot of information. The question our commercial property experts are often asked is, are the heads of terms legally binding?
The way in which the heads of terms are considered, in being legally binding or not, relate predominately to how the same have been drafted. The heads of terms are, often, marked ’Subject to Contract’, in order to confirm that the stipulations therein are made subject to contract. This, essentially, confirms that the parties do not intend upon being legally bound by the entries within the heads of terms, and that the same are simply in place to provide a degree of certainty on various factors relevant to the transaction.
Your commercial property solicitor would, of course, be checking whether the same had been marked in such manner, and be advising on what the same means, accordingly.
There are certain circumstances in which the heads of terms may be considered legally binding, and are set out within Law of Property (Miscellaneous Provisions) Act 1989. You can view the Act, and it’s respective sections, here. Essentially, an agreement can be considered legally binding where it is:
In writing;
Include the terms that have been expressly agreed;
Have been signed by the respective parties;
Makes provision for the intention to create a legal relationship, by way of an offer that has been accepted.
As you can see, there may be times where heads of terms may be considered legally binding. Your property solicitor will, however, require sight of the agreed terms, and will be able to advise accordingly, dependent on the information noted thereon. Our team know exactly what to look out for to ensure that you do not become legally tied down to, what may be considered, mere preliminary discussions.
For more on contracts, and more particularly conveyancing contracts, see our blog, here.
The heads of terms will be referred back to, throughout the transaction, which means they play an important role within the conveyancing process. It is, therefore, important to ensure that the same are an accurate reflection of what has been agreed, and that there are no nasty surprises that may arise down the line.
It can, of course, be difficult to reach an agreement, in some cases. So, what can you do to assist? Our Preston solicitors’ top tips include:
Knowing what you want: Being sure of your needs is imperative, as uncertainty in this regard could lead to an unfavourable agreement. You should, therefore, set out your requirements from the outset, to ensure you know what you want to agree upon and, indeed, what you may not want to agree on.
Flexibility: Consider how flexible you can be during the negotiations. Being flexible in one respect could work in your favour in reaching agreement of another. An amenable relationship between landlord and tenant is encouraged and, therefore, it is important to ensure a balance can be struck, but ensuring that all parties are in agreement.
Legal Expertise: Dealing with commercial property can be daunting, as there are so many different items to consider. So, always start by consulting the expertise of your commercial property conveyancing solicitors, who can walk you through the transaction. Contact our team today, at property@mglegal.co.uk.
