Commercial lease heads of terms: 10 things tenants should check before signing

Heads of terms set out the main deal for a new lease before the lawyers start work. Many tenants treat them as a formality. In fact, commercial lease heads of terms usually decide the rent, the length of the lease and who pays for what. Changing a point later is much harder. Here are 10 things we suggest you check before you sign.

Commercial lease heads of terms: what they are and why they matter

Heads of terms are a summary of the agreed deal, usually marked “subject to contract”. They are normally not legally binding, but the solicitors will draft the lease from them. If a point is missing or vague, it can be hard to win back later. Trying to change the terms set out in the heads of terms can cause friction. Agree it properly now.

Rent and money

1. The rent and how it is quoted. Check the annual figure, whether VAT applies and when payments start.

2. Rent-free or reduced rent. If an incentive is offered, check how long it lasts and whether it is lost if you leave early.

3. Rent reviews. Check when they happen and how the new rent is set. Upward-only reviews cannot fall, even if the market does.

Length of lease and flexibility

4. The term. Choose a length that matches your business plans. Remember that a landlord will consider this together with the rent and any incentives they offer. Find the right balance.

5. Break clauses. A break lets you end the lease early. Check the dates, the notice period and any conditions, such as paying all rent due.

6. Security of tenure. Check whether the lease will be protected under the Landlord and Tenant Act 1954, which affects your right to renew. Ask your adviser to explain the position.

Costs, repairs and use

7. Service charge. Ask what is included, how it is budgeted and whether there is a cap.

8. Repairing obligations. A full repairing lease can leave you responsible for the whole building. Understand what you are getting into before you commit.

9. Permitted use and alterations. Make sure the use clause covers how you operate now and how you may want to grow. Check what changes you can make to the space.

The final check: costs and guarantees

10. The tenth point is the cost of getting the deal done. Agree who pays legal and agent fees. Also ask whether Land Transaction Tax may apply to the lease in Wales. Your adviser and accountant can confirm the position early.

Ask questions and take advice before you sign

Before you reply to the heads of terms, it helps to list your questions. Ask whether the landlord will negotiate on rent, incentives and break dates. Ask what the building’s running costs have been in recent years. Ask whether any works are planned that could raise the service charge. Clear answers now avoid disputes later.

Landlords usually have an adviser who knows these documents well. It helps if you do too. An independent adviser can compare the terms with the market, negotiate points that matter and flag risks before they become costs. Because heads of terms come first, this is the cheapest moment to ask for changes.

Get advice before you sign

M4 Property Consultants helps occupiers with property acquisition, lease renewals, rent reviews and property strategy. If you have been offered heads of terms and need help, contact Dan at [email protected] or call 01633 740 740. We offer a free consultation, so you can talk through the terms before you commit.