Many solicitors are first instructed on a commercial property deal when agreed heads of terms (“HoTs”) land on their desk and it is all systems go.
So, what are HoTs and how can investing time in them before solicitors are instructed save a party time and money in the long run?
HoTs are a set of terms reflecting the negotiated position between the parties to aid the transaction to be documented.
Often HoT’s are presented on an email against a series of bullet points, far too short and lacking in detail. The solicitor then either expends a lot of time (and the client’s money) on taking instructions which invariably then require agreement by the other side, or interpreting the HoT’s and preparing the documents that then come back heavily amended. Other times, HoT’s are so detailed, running into pages – they are in danger of becoming the document.
Well thought out HoTs will be brief, set out the main terms and structure of a transaction, the timing of a transaction and identify any problem areas to be resolved. If the HoT’s are agreed between the parties, one solicitor can quickly get on and use the HoT’s to draft the documents whilst the other party’s solicitor will use the HoT’s as a checklist when reviewing the first drafts.
Are HoT legally binding?
In short, maybe.
The general principle is clear, HoTs are not legally binding, even if you sign them. They merely evidence a serious intent and have moral force, but do not legally compel the parties to conclude the deal on those terms. Points can therefore be revisited and renegotiated (although confidentiality, exclusivity and costs provisions may be binding on the parties if that was the intention from the outset).
However, HoTs may easily become legally binding if they fall within section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. This could be catastrophic where the terms do not accurately reflect what the parties thought they had agreed.
Marking HoT’s and any correspondence pertaining to them as “subject to contract” means they will not usually be treated as a legally binding agreement.
HoTs in contemplation of a new lease
On the 1 September 2020 the new Royal Institution of Chartered Surveyors (“RICS”) professional statement, Code for Leasing Business Premises, England and Wales 2020 (“the Code”) took effect and encourages parties to new lease negotiations to adopt a collaborative approach.
The Code contains some mandatory requirements relating to HoTs that must be complied with by RICS agents or landlords that are RICS members or RICS regulated firms. Part 4, Appendix A of the Code includes a useful optional template HoTs as well as a checklist for those who prefer to use their own form of HoTs which can be found here
Who should prepare HoT’s?
Any negotiating party can prepare draft HoT’s. They are usually prepare by a seller, landlord, charger, land owner etc and given to the other side to agree. Alternatively in large complex transactions, the prospective parties could be negotiating terms for a long time before someone collates all the information and prepares HoT’s . There really is no right way or wrong way.
Whilst many will look to an agent to prepare HoT’s, it is advisable to engage a solicitor at the outset of negotiations particularly in contemplation of complex transactions so that gaps can be spotted and dealt with early on.
If you have any questions and/or would like advice on any Commercial Property, please speak to Kuldip Matharoo at: firstname.lastname@example.org or to your usual Dixcart contact.