Commercial Real Estate Transactions and Heads of Terms

Q1: Should you consider agreeing heads of terms for a commercial real estate transaction?

Heads of terms are commonly used in all property transactions and set out the main points of the deal. They are sometimes long and detailed but are often shorter just setting out the key points. Solicitors see them in all shapes and sizes.

Q2: What are the benefits and drawbacks?

There are a number of potential benefits in agreeing heads of terms as they:• Serve as a record of what has been agreed;• Can be used as a guide/framework to structure the deal;• Add clarity to the terms and provide focus;• Show parties commitment;• Can prevent misunderstandings arising later;• Manage parties expectations with regard to timescales;• Can assist when obtaining quotes for legal fees;• Can sometimes speed up the legal process.

There are also some potential drawbacks as detailed heads of terms leave little room for negotiation when the legal documentation is drafted and poorly drafted heads of terms can have adverse consequences for clients as they may have agreed points without thinking through the legal consequences.

Q3: What are the top ten points to include?

1.Parties details including company numbers/ charity details. 2.A description of the property — is it part or whole? 3.Price or Rent of it’s a lease including whether there will be a rent review?4.The lease Term including whether there are any break clauses5.Repair and insurance obligations/ responsibilities6.Permitted Use and whether there are any restrictions7.Security of tenure considerations8.Alienation restrictions / allowances9.Whether alterations permitted or prohibited10.Anything deal or property specific

Q4: Are there any other points to think about that often get missed?

• Service charge liabilities should be made clear from the start. Will the tenant be liable for a fair proportion or a fixed percentage. Caps can then be discussed and agreed if appropriate. • Break clauses and how they operate? What mechanism for the break clause has been agreed. Will this be a mutual break exercisable by either party or Landlord or Tenant only. The other consideration is whether it will be on a fixed date or rolling.• Whether there are any incentives — for example: landlord’s works, installation of carpets, cash contributions;• Agreed timing — any deadlines for exchange and completion.• Any conditions to be incorporated into the transaction? For example does planning permission need to be obtained and so a conditional contract be required?• Any required additional security? Does the Landlord require a Guarantor or rent deposit. • VAT considerations — is it payable? This can sometimes make a difference to the parties within a deal. • Any specific environmental considerations – for example the property is on an old petrol station site.

Q5: Who would you recommend drafts them?

When it comes to drafting heads of terms this can be done by the parties between themselves but more often than not we see heads of terms drafted by agents or surveyors acting for the parties. The benefit of agents or surveyors drafting them is that they will help you to consider the commercial and legal implications of the deal.

Involving commercial real estate solicitors in the drafting can be costly but could be useful in a complex deal and we are always happy to assist.

The best course of action I would recommend is arranging for somebody well versed in agreeing heads of terms to prepare them on your behalf and before you agreed them to pass the heads of terms to your solicitor so that they can review them and advise on any potential difficulties or drawbacks from a legal prospective so you can make an informed decision before you confirm they are agreed.

Experienced commercial property solicitors

Whether you are acquiring, disposing of, developing, managing or funding commercial property, or for more information on commercial real estate matters call our commercial property solicitors now for expert, impartial and professional advice on 01895 207285, or email us at CRE@ibblaw.co.uk. Alternatively for more information please visit https://www.ibblaw.co.uk/service/commercial-real-estate.

For further information on commercial property matters please see the respective pages below:

Commercial Property Financehttps://www.ibblaw.co.uk/service/commercial-real-estate/commercial-proper…

Commercial Property Developmenthttps://www.ibblaw.co.uk/service/commercial-real-estate/commercial-proper…

Commercial Property Investment and Managementhttps://www.ibblaw.co.uk/service/commercial-real-estate/commercial-proper…

Commercial and Business Leaseshttps://www.ibblaw.co.uk/service/commercial-real-estate/business-leases

Video Resources:Commercial Land Development and Purchase: Advice for DevelopersCommercial Tenant Considerations: Taking on a New Lease