Heads of Terms - Agreeing a Satisfactory Lease

The market, the parties and negotiating the lease

The agreement of a satisfactory lease requires co-operation between landlords, agents and lawyers. The relationship between the client and the lawyer in the negotiation process is crucial and each should be “on the same page” with the other so that they may co-ordinate with and support the positions during the negotiation process.

Understanding the transaction

It is vital that both the client and their solicitor understand the legal and practical implications when drafting the conditions or reviewing the conditions of a new lease. These details are often of a highly technical nature and it is crucial to ensure that they are legally correct and appropriate for the client’s circumstances. Inevitably in some cases the nature of a particular provision will depend on the prevailing market conditions and the balance of power between the landlord and the tenant and the seller and the buyer at the time.

Market conditions and the balance of power

A crucial part of the relationship between the solicitor and the client is ensuring that the solicitor is fully aware of the client’s particular requirements and the client is aware of the legal issues that may affect them going forward. A client will naturally want to ensure the maximum utility in respect of their interests in a property whilst limiting their own exposure to risk and obligations to the other contracting parties. A good solicitor will quickly add value to a transaction in understanding the client’s requirements ensuring that the terms of the lease meet those requirements as far as possible in view of the prevailing market conditions. In a buoyant market a landlord is generally in a better position to dictate terms to a tenant.

Heads of terms

A key consideration is at what point a client should involve a lawyer in order to prepare or review heads of terms. In my experience the earlier the lawyer is involved the better. This is because the lawyer can point out at an early state legal issues or risks that the client is likely to encounter during the negotiations or in relation to any early or proposed agreement.

The purpose of the heads of terms is to set out a summary of the basis on which the lease is to be granted. In most cases the heads of terms will be in the region of five to ten pages long in order to set markers for the main provisions of the lease whilst leaving the matters of detail to later on in the negotiation process. Whether heads of terms are produced without proper advice it is possible for an agreement to quickly unravel because of issues of risks or legal or practical problems that were not anticipated by the negotiating parties.