Heads of Terms Commercial Lease UK: Full Guide

What this document is

Heads of Terms (sometimes called HoTs, a term sheet, or an agreement in principle) is a written summary of the main commercial points of a proposed lease. It is drawn up between landlord and tenant, often with input from a commercial agent on each side, before any formal lease is drafted.

The document is usually marked 'subject to contract', which means neither party is legally committed to the deal at this stage. Only when the lease itself is signed and dated, and in some cases when a rent deposit is paid, does a binding tenancy come into existence.

That said, once Heads of Terms are agreed in writing, it can be awkward and expensive to try to renegotiate core points later, so treat them as serious. A well-drafted set of Heads of Terms covers the property description, rent, term length, break rights, rent reviews, repair standards, permitted use, assignment and subletting, service charge, and whether the tenancy falls inside or outside the security of tenure provisions of the Landlord and Tenant Act 1954. The clearer these points are at the start, the smoother the legal drafting becomes.

How to use this document

1. Confirm the parties and the property. Write down the full legal names of the proposed landlord and tenant, including any company numbers and registered addresses. Describe the premises precisely, with unit number, floor, address, and where possible a plan showing exactly what is included. Ambiguity here causes disputes later, particularly around shared areas, yards, parking spaces, and storage. 2. Agree the term, break clauses and security of tenure. Decide how many years the lease will run, when it starts, and whether either party can end it early through a break clause. State clearly whether the lease will be contracted out of sections 24 to 28 of the Landlord and Tenant Act 1954, because contracting out removes the tenant's automatic right to renew at the end of the term and requires a specific statutory notice procedure before completion. 3. Set out rent, deposit and rent review. Record the annual rent, how often it is paid, whether VAT is added, and whether any rent-free period applies at the start. If a rent deposit is required, state the amount and when it is returned. For leases longer than around five years, rent reviews are common, so agree the review dates and the mechanism, whether that is open market, indexed to RPI or CPI, or fixed increases. 4. Deal with repairs, service charge and insurance. Clarify who is responsible for the structure, roof, windows, interior and plant. Full repairing and insuring terms are common but can be heavy for a tenant taking an older building, so consider a schedule of condition to cap repair obligations. Note how service charge is calculated, what it covers, and who insures the building and recharges the premium. 5. Cover use, alterations, assignment and subletting. State the permitted use under the Town and Country Planning Use Classes Order, and whether the tenant can carry out fit-out works or alterations and on what conditions. Address whether the lease can be assigned to a new tenant or sublet, and any guarantor or authorised guarantee agreement requirements. Finish with a 'subject to contract' statement and a target date for completion.

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