In the middle of trying to agree Heads of Terms for a commercial property? Before you agree terms, consider this:
Many solicitors are first instructed on a commercial property deal when agreed heads of terms (“HoTs”) land on their desk.
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. For more information see 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 contact us at: firstname.lastname@example.org or to your usual Dixcart contact.
Struggling to pay your rent for your business premises? You are not alone. With data analysts reporting of Landlords being down £5.3bn on rents last year, there was a mixed reaction to the government announcement earlier this year to extend the moratorium on the forfeiture of commercial leases, effectively restricting landlord’s options to recover rent. In England and Wales the “relevant period” preventing a right of re-entry or forfeiture for non-payment of rent by commercial tenants was extended to the 25 March 2022 having been extended a number of times since the 26 March 2020.
Post pandemic lock-downs and we are slowly seeing a return to normal. But, some sectors continue to remain closed, including nightclubs and the hospitality sector. Addressing those businesses that continue to struggle, the latest extension in June 2021 came as the Communities Secretary announced that legislation will be introduced with the aim of ring-fencing unpaid rent with landlords expected to make allowances. What this actually means and how it is enforced we shall have to wait and see but it is likely to range from waiving arrears to long-term repayment plans. A binding arbitration process has also been suggested to help those on a cliff edge due to mandatory lock-downs.
Until the changes are announced, no conduct by or on behalf of a landlord is to be regarded as waiving a right of re-entry or forfeiture for non-payment of rent, unless the landlord gives an express waiver in writing (section 82(2) of the Coronavirus Act 2020). Unless there are further extensions of the moratorium, the landlord can re-enter after 25 March 2022. Indeed, the government is making clear that businesses who are able to pay rent, must do so. Tenants should start paying their rent as soon as restrictions change, and they are given the green light to open.
Somewhat buried by the news of the extension of the moratorium was the governments promise to extensively review the Landlord and Tenant Act 1954. We have little detail at the moment but watch this space!
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