Whilst it is generally acknowledged that Heads of Terms (HOTs) are not normally intended to be legally binding, experience dictates that once terms are agreed it is tricky to change the agreement. This article explains why commercial tenants should instruct a solicitor before agreeing HOTs.
What are Heads of Terms (‘HOTs’)?
Let’s take a look at what Heads of Terms are in commercial transactions. HOTs are a document that lays out the terms of a commercial transaction that have been agreed in principle by the contracting parties during negotiations.
They are typically seen to demonstrate a commitment to the proceeding of the transaction at hand and therefore do hold ‘moral force’. However, Heads of Terms are not normally a contractually binding document. Therefore they cannot force either party to follow through with the transaction.
HOTs or Heads of Terms are also known as ‘letters of intent’, ‘memoranda of understanding’, ‘letters of potential interest’, ‘term sheets’ or ‘protocols’.
What are HOTs in commercial property transactions?
In the context of commercial leases, you’ll encounter HOTs during the negotiation process. These are normally prepared by the landlord’s agent and will lay out aspects of the transaction such as:
Who the contracting parties are
Details around the property to be sold or leased
The agreed rent or sale price
Length of lease
Do I need a solicitor to negotiate my commercial lease?
Put simply, yes. Here’s why:
Typically, in a commercial transaction, a prospective tenant will enquire with a commercial agent whether a property is available to let. There will then be high level negotiations regarding the annual rent, the lease term and, potentially, a break provision. Only once terms are agreed will the tenant look to instruct a solicitor.
The problem with this chronology is the imbalance in legal and commercial knowledge between the parties. The landlord is likely to be experienced and supported with a knowledgeable commercial RICS agent. The tenant may have little or no experience regarding commercial property and likely lacks the necessary knowledge to negotiate competently.
Legal Expertise is key to negotiating HOTs
Each transaction is unique. And without legal and commercial experience and expertise, tenants may not be aware of the kinds of questions they should be asking. For example,
Is a schedule of condition advisable (limiting potential dilapidations liability)
Should specific service charge costs be excluded?
Is the break notice conditional upon payment of “rents”?
Is a service charge cap appropriate?
Without these points being specifically addressed in the HOT’s, the landlord’s solicitor is likely to dispatch a “landlord friendly” lease which does not cater for the tenant’s individual needs. Trying to retrospectively insert these into a lease is normally met with a response along the lines of “that wasn’t agreed in the HOT’s” or “this is a standard lease for the landlord and cannot be changed”. In other words, it’s an uphill and time-consuming struggle.
So, the advice to prospective tenants is to engage a solicitor before you agree HOT’s. Both you and your solicitor can then negotiate terms as a team with strength of knowledge and experience.
If you’re looking for advice relating to commercial property, whether you’re a prospective tenant, property-owner looking to sell, or a landlord wanting to rent, our expert lawyers are here to help. Get in touch to learn more about how we can support you at every stage of the process.