When preparing to grant or assign a lease, the importance of establishing clear and comprehensive heads of terms at the outset cannot be underestimated. It can avoid lengthy negotiations later on in the transaction, which will ultimately save both time and costs for the Landlord and the Tenant.

Here is a brief summary of the main points to consider:

  1. Parties: Before entering into a Lease, the Tenant should think carefully about its structure. A company structure may be preferable to limit liability of directors and shareholders will be limited to the company assets? However, if the tenant is to be a newly formed company, a well advised landlord is likely to require some form of security, such a rent deposit deed or third party guarantee. Tenants should be wary giving a third party guarantees as they can be very onerous.   Rent deposits are often preferable but as the money will often be tied up for the term of the lease this can have a negative impact on cash-flow.
  1. Length of term: This will be dependant on the requirements of the Landlord and Tenant and the nature of the lease. In recent years the trend has been for leases to be shorter (rarely do you see a lease over 15 years). Whilst a longer lease may provide a tenant with certainty (important if investments are being made into the property or a retail business is being established), a shorter lease may be more valuable in an unsettled economy, as it provides flexibility to the Tenant.
  1. Rent and Rent Review: Will there be a rent review according to external factors, such as changing market conditions (open market rent review) and inflation (retail price index review).  If so, how often will the reviews take place?
  1. Service Charge: If a service charge is payable, a tenant will want to know how the Landlord will calculate the amount the tenant will be required to pay. Service charges can be problematic for tenants as they represent a potentially open ended liability.  A tenant will want to know if there is any significant expenditure expected in the future. It may be possible to agree a service charge cap, whereby in any year the charge to the tenant cannot exceed a certain limit.
  1. Security of Tenure: Unless security of tenure is specifically excluded, certain business leases will automatically be awarded ‘security of tenure’ meaning that the tenant will have an automatic right to request a new lease from the Landlord on broadly the same terms.  The Landlord would only be able to refuse this on certain limited statutory grounds (some of which require the payment of compensation to the tenant).
  1. Insurance: Usually this will be via a ‘Fully Repairing and Insuring Lease’ whereupon the Landlord will procure the insurance, with the Tenant reimbursing the premium to the Landlord.
  1. Repairing Obligation: It should be clear whose responsibility it is to repair the property. A full repairing lease is common for longer leases, whereby the tenant has full responsibility for the repair of the whole of the property and is normally directly responsible for carrying out the repair and the costs.  However, if the leased property forms part of larger premises it would be usual for the tenant to be responsible for the property (interior only) and then the tenant would be indirectly responsible for the costs of repairs to the exterior, structure and common parts of the premises through the service charge.
  1. Permitted Use: The Landlord will inevitably want to restrict the use of the Property in some way perhaps due to the nature of the property, planning or title restrictions or simply to protect the vale of their investment. A tenant will want to ensure that the permitted use is wide enough to allow for the growth of the business and that they will be able to assign or underlet the property.
  1. Alterations: The landlord will wish to assert some form of control over the property to protect their investment and to ensure any alterations are carried out to a safe and adequate standard. A common restriction is that alterations to the exterior/structure of the property will are prohibited but non-structural alterations to the interior are allowed, with the landlord’s consent (not to be unreasonably withheld).
  2. Assignments and Underleases: A balance needs to be struck between the Landlord’s concern to protect its investment and the tenant’s ability to dispose of the Lease, should the property become surplus to requirements or unsuitable for its needs. A common lease provision will allow the tenant to assign the whole of the Lease with the Landlord’s consent. Underletting may be prohibited entirely or, alternatively, underletting of the whole of the property or specified parts will be permitted again, with the Landlord’s consent.