If you are taking on commercial premises, heads of terms should never be treated as a throwaway summary.
They are usually agreed before the lease is drafted and are commonly marked “subject to contract”, but they still shape the transaction in a very real way. In England and Wales, the RICS Code for Leasing Business Premises expects written heads of terms to cover the main commercial points before the legal drafting begins, including rent, term, repair, service charge, use, break rights and the security of tenure position.
That matters because once solicitors are instructed, the legal work often starts from whatever has already been commercially agreed. If key points are missing, unclear or based on assumptions, the deal can slow down, costs can increase, and avoidable risks can be built into the lease before anyone properly challenges them.
At Atalaw Solicitors, the approach across services is clear, practical and straightforward. That same style comes through whether you are reading about commercial lease solicitors for tenants, landlord and tenant, civil litigation, debt recovery, housing disrepair services London, tenant eviction, about us, contact us, commercial lease solicitors for restaurants, and commercial lease solicitors for accountants. The focus is on helping you understand the real-world impact of the wording before you commit.
Why heads of terms matter before solicitors are instructed
A commercial lease is rarely just about the headline rent.
It can affect what you pay towards insurance and service charge, whether you are responsible for putting an older building into repair, whether you can leave early, whether you can sublet later, and whether you may have a right to renew when the term ends.
If those commercial points are dealt with early, your solicitor can concentrate on protecting your position and tightening the legal drafting. If they are not, you may end up paying for long negotiations about points that should have been settled before the first draft lease was even sent across.
That is especially true for tenants. Atalaw’s tenant lease page makes the point clearly: the wording you sign can affect your costs, flexibility and risk for years, particularly around repairs, service charges, rent reviews, break clauses and exit routes.
The main points that should be agreed in heads of terms
The parties and the property
You should make sure the correct parties are identified from the outset. That includes the landlord, tenant and any guarantor. The premises also need to be described properly.
If the deal includes a yard, parking, storage, outside space, access rights or signage rights, that should be stated now. Problems often start when one side assumes an area is included and the other side does not.
The lease term
The length of the lease sounds simple, but it has a big effect on risk.
A 3-year commitment is very different from a 10-year one. You should think about the term alongside your business plans, your likely fit-out costs and how much flexibility you may need. A longer term may support stability, but a shorter one may be more sensible if you are testing a new location or market.
Rent, VAT and any rent-free period
The annual rent should be clearly set out, but that is not enough on its own.
You should also know whether the rent is payable monthly or quarterly, whether VAT is chargeable, whether there is a rent-free period, and whether there are any stepped increases. The current leasing code specifically expects heads of terms to cover rent, VAT and any rent-free arrangements.
Rent review
If the lease will run for more than a short period, rent review may become one of the most important financial clauses in the whole deal.
You need to know when reviews happen and how they work. Is the review based on open market rent, a fixed increase, or an index-linked formula? If you leave this vague in the heads of terms, the lease drafting stage can become more difficult than it needs to be.
Security of tenure
This is one of the most important issues in any business lease.
Part II of the Landlord and Tenant Act 1954 gives many business tenants a statutory right to remain in occupation and seek a new tenancy when the lease ends, unless the lease has been properly contracted out of that protection. Whether the lease is inside or outside the 1954 Act should be agreed at heads of terms stage, not left until later.
If you miss this point, you may only realise much later that your long-term position is not what you thought it was.
Break rights
If you want the option to leave early, the break clause needs careful attention from the start.
The heads of terms should cover who has the right to break, when the break can be used, how much notice must be given and whether there are conditions attached. A break clause can look helpful on paper but be very hard to use in practice if the conditions are too strict.
Repairing obligations
Repair liability is one of the biggest cost risks in commercial leasing.
You need to know whether the lease is full repairing, whether the premises are being taken in their current condition, and whether a schedule of condition should be attached to limit your exposure. If the building is older or already worn, this point becomes even more important.
Atalaw’s commercial lease pages also highlight repairs, dilapidations and reinstatement as areas where tenants can end up carrying more risk than they expected if the wording is not checked carefully.
Service charge and insurance
If the property is part of a larger building or estate, service charge can become a major ongoing cost.
You should understand whether you are contributing to maintenance, repairs, management costs, security, cleaning or major works. RICS service charge guidance makes clear that service charge arrangements are set by the lease and can include defined costs linked to the management and operation of the property.
Insurance rent should also be clear. You do not want to agree the premises based on the headline rent alone, only to find that the overall occupation cost is much higher than expected.
Permitted use
The use clause should match what you actually plan to do from the premises.
This is not just about broad labels such as office, retail or restaurant. It is about how the property will operate in real life. If your intended use is too narrow, you may have issues later if the business changes direction or expands its services.
That is particularly important in specialist sectors. Atalaw’s restaurant lease page highlights the need to align the lease with planning use, licensing and operational requirements, rather than assuming those issues will sort themselves out later.
Alterations and fit-out
If you need to carry out works, install equipment, change signage or reconfigure the space, the heads of terms should deal with that.
You should know what is allowed, what needs landlord consent, and whether you may be required to reinstate the property at the end of the term. This is especially important where the business depends on a specialist fit-out.
Assignment, subletting and sharing occupation
Even if you expect to stay for the whole term, it is sensible to think ahead.
Can you assign the lease? Can you sublet part or all of the premises? Can you share occupation with a group company or business partner? The more flexibility you have, the easier it may be to adapt if circumstances change.
Deposit, guarantor and conditions
If the landlord wants additional security, the heads of terms should record whether that will be a rent deposit, a guarantor or both.
Any amount, trigger or release mechanism should be clear. You should also identify any conditions to the deal, such as finance approval, landlord works, planning, licensing, board approval or vacant possession.
Common mistakes to avoid
Here are some of the mistakes that most often create problems:
- Assuming heads of terms are only an agent’s note
- Agreeing rent but not total occupation costs
- Missing the 1954 Act position
- Treating break clauses as standard wording
- Ignoring repair liability until the lease draft arrives
- Leaving service charge too vague
- Failing to match the use clause to the business plan
- Forgetting to deal with fit-out or landlord’s works
- Overlooking deposit or guarantor obligations
- Instructing solicitors before the main commercial points are settled
Final thoughts
Heads of terms are where the commercial shape of the deal is set. They are your chance to identify the important points before the legal drafting starts and before your costs begin to build.
If you get them right, your solicitor has a solid foundation to work from. If you get them wrong, even a well-drafted lease may still reflect a poor commercial bargain.
If you are about to take on business premises, renew a lease or negotiate a new deal, Atalaw Solicitors can help you review the key points before you commit. Visit the commercial lease solicitors for tenants page or contact us to get clear, practical advice on the terms that matter most before the lease is drafted.