Heads of Terms in commercial property transactions, otherwise referred to as Memoranda of Understanding, set out the basic future intentions and expectations of the parties involved, albeit prior to any agreement being signed.

The basic premise of Heads of Terms is to set out the key terms agreed by the parties without being legally binding. Whilst these terms are evidence of serious intent, they do not usually legally compel the parties to conclude the deal on those terms, or even at all.

That said, Heads of Terms are commonplace in the context of commercial negotiations, and are used in a variety of different commercial property transactions, including the sale and purchase of freehold and leasehold land, as well as lease negotiations.

Needless to say, given their widespread popularity, there are several advantages to Heads of Terms, including but not limited to the following:

• To provide written confirmation of the main terms agreed in principle.

• To provide a framework for certain preliminary legally binding clauses, such as an exclusivity agreement locking out other prospective buyers.

• To outline the timetable and obligations of the parties during the course of negotiations.

• To provide the parties with pre-contractual clarity, thereby avoiding any abortive costs associated with due diligence and the drafting of definitive agreements.

Heads of Terms in commercial property transactions are generally drafted by or on behalf of the seller or landlord of commercial premises, to be approved by all parties involved, and tailored to suit the nature of the transaction in question.

The parties may even enter into a series of Heads of Terms, particularly when negotiations are prolonged. Broadly speaking, however, the Heads of Terms for the sale or purchase of a commercial freehold or leasehold should include the following key information:

• The names and details of the parties

• A description of the land or property

• The price or rent

• Any additional costs to be considered

• Any conditions which the transaction is subject to, eg, planning consent

• The timings

• The details of any representatives, eg, conveyancers and surveyors.

For commercial leases, the Heads of Terms should include the following:

• The parties, including any guarantor

• The length of the lease term

• The security of tenure, ie; whether the lease falls within the protection of the Landlord & Tenant Act 1954

• Any break clauses, ie; whether the lease will have a break in it and, if so, any conditions so as to make a break effective

• The rent, including the method and frequency of payment

• Any rent review, ie; when and on what basis

• Any rent deposit, including when this will be returned

• Any service charges, including the nature of the services provided

• The responsibility for any insurance

• The permitted use of the premises

• The responsibility for repairs

• Whether alterations are permitted

• Whether subletting or assigning the lease to a third party is permitted

• The responsibility for costs.

Having agreed Heads of Terms for a commercial property transaction, and assuming the deal is to go ahead, the parties can then agree how to proceed by way of a definitive agreement.

By way of warning, however, parties should always ensure that Heads of Terms are marked “subject to contract”. In exceptional cases, Heads of Terms have been held by the courts to be legally binding, so if you are in any doubt as to the legal status of a document you should always seek professional advice.