What Should Go in Heads of Terms?
When negotiating a new commercial lease, well-drafted heads of terms (also known as HoTs) provide the essential framework for the final lease agreement.
According to the RICS Code for Leasing Business Premises (2020), clear, detailed heads of terms are not only best practice but also a mandatory requirement for RICS members.
They ensure transparency between landlord and tenant, shorten the legal drafting process, and reduce the likelihood of costly disputes later.This article explains in detail what should go into heads of terms, highlighting the mandatory and recommended provisions under the RICS Code.
The Role of Heads of Terms
Heads of terms are a document that records the key commercial terms agreed between landlord and tenant before the lease is drafted.
They are not legally binding (except for confidentiality or exclusivity clauses if agreed), but they play a critical role in setting expectations and guiding solicitors.
The RICS Code for Leasing Business Premises (2020) requires members to ensure that heads of terms cover the fundamental elements of the deal in clear, unambiguous language. The aim is to create a fair and transparent basis for both parties.
Mandatory Requirements Under the RICS Code
The 2020 Code sets out specific elements that must be included in heads of terms:
- Identity of parties: Names and addresses of landlord, tenant, and any guarantors.
- Property: Clear description of the premises, including any standard parts or shared areas.
- Term: Start date, length of lease, and any rights to renew.
- Rent: Amount, frequency of payment, and whether VAT is payable.
- Rent review: Timing, basis (e.g., open market, index-linked), and any caps or collars.
- Break rights: Conditions under which either party can terminate early.
- Service charges: Basis of contribution, estimated costs, and any caps.
- Repairing obligations: The extent of tenant repair (e.g., full repairing, internal only).
- Alienation: Whether assignment, underletting, or sharing occupation is permitted.
- User clause: Permitted use of the premises.
- Alterations: Whether the tenant can alter, improve, or fit out the property.
- Insurance: Who insures, what risks are covered, and how premiums are shared.
- Guarantees or deposits: Details of rent deposits or third-party guarantees.
These are the core areas that RICS members must address. Failure to include them could amount to professional non-compliance.
Best-Practice Provisions to Strengthen Heads of Terms
Beyond the mandatory requirements, landlords and tenants should also consider including further details for clarity and fairness:
Break Conditions
Break clauses often become a source of dispute. Heads of terms should specify:
- Who holds the break right (landlord, tenant, or both).
- The break date(s).
- The conditions that must be satisfied (e.g., rent paid up to date, vacant possession).
- Whether compliance with all covenants is required (a common cause of litigation).
Best practice is to keep break conditions simple, limiting them to payment of principal rent and giving up occupation.
Rent Review Basis
Clarity is critical. Heads of terms should state:
- Review dates.
- Review mechanism (open market rent, index-linked to RPI/CPI, fixed uplifts, or turnover rent).
- Whether reviews are “upwards only” or “upwards and downwards.”
- Any restrictions on comparable evidence (e.g., disregarding tenant improvements).
Repairing Obligations
The scope of repairs can drastically affect tenant liability. Heads of terms should confirm whether:
- The tenant is responsible for full repairing and insuring (FRI) obligations.
- Repairs are limited to internal areas only.
- The landlord will provide a schedule of conditions to limit liability to the property’s state at the start.
Alienation Provisions
Alienation governs whether the tenant can transfer or share occupation. Heads of terms should cover:
- Whether assignment of the whole is permitted (usually yes, subject to landlord consent).
- Whether subletting is allowed (whole or part, on what terms).
- Restrictions on sharing occupation (e.g., with group companies).
- Whether landlord consent is required and on what grounds it may be refused.
Service Charges
Service charge disputes are common. Clear heads of terms should state:
- What services are included (cleaning, security, maintenance)?
- How costs are allocated (pro-rata, floor area).
- Any caps on increases.
- Treatment of major capital works.
Alterations and Fit-Out
Tenants often need to adapt premises. Heads of terms should state:
- Which works require the landlord’s consent (structural vs non-structural)?
- Can consent be withheld or delayed?
- Obligations to reinstate alterations at lease end.
Insurance Obligations
Heads of terms should make clear:
- Does the landlord insure the building and recharges premiums?
- What risks are covered (fire, flood, terrorism)?
- Who pays for uninsured risks?
- How does rent suspension work if the premises become uninhabitable?
Benefits of Clear Heads of Terms
Properly drafted heads of terms benefit all parties:
- Faster legal drafting: Solicitors have a clear roadmap, reducing negotiation time.
- Reduced disputes: Clarity avoids misunderstandings about obligations.
- Fairness and transparency: Both parties know where they stand.
- Cost efficiency: Legal costs are kept lower with fewer points of contention.
The RICS Code stresses that clarity at the heads of terms stage is crucial for reducing the risk of disputes later in the lease.
Common Pitfalls to Avoid
Even experienced landlords and tenants can fall into traps when drafting heads of terms:
- Vague break conditions: Phrases like “subject to compliance with all covenants” can make break rights worthless.
- Unclear rent review clauses: Failing to specify whether reviews are upwards-only creates confusion.
- Overly broad repair obligations: Tenants may unknowingly accept liability for pre-existing defects.
- Service charge surprises: If not capped or defined, charges can spiral unexpectedly.
- Alienation restrictions: Overly tight controls may damage tenant flexibility and business growth.
Practical Drafting Tips
When preparing heads of terms under the RICS Code:
- Use clear, plain English. Avoid jargon and ambiguity.
- Include all mandatory provisions explicitly.
- Tailor terms to the property type (e.g., retail, office, industrial).
- Reflect the commercial realities of both parties.
- Ensure any time-critical provisions (e.g., break dates) are precise.
- Avoid drafting mini-leases – keep heads of terms concise but complete.
FAQs
Are heads of terms legally binding?
Generally, no, but specific provisions (such as confidentiality or exclusivity) may be expressly binding.
What happens if heads of terms are incomplete?
Missing key elements can cause delays in lease drafting and increase the risk of disputes. RICS members are required to ensure completeness.
Can heads of terms be changed later?
Yes, but renegotiation can be costly and time-consuming. It is best to settle all critical points before legal drafting.
Who prepares the heads of terms?
Usually, the landlord’s agent, but both parties should review carefully.
Do heads of terms need to follow a template?
RICS provides a recommended model, but parties can adapt it to suit their needs.
Conclusion
Heads of terms are the foundation of any commercial lease.
By following the RICS Code for Leasing Business Premises (2020), landlords and tenants ensure transparency, fairness, and efficiency. Including mandatory elements such as rent, term, repairing obligations, break rights, alienation, and service charges is essential.
Adding best-practice provisions and avoiding vague or unfair terms will shorten legal drafting, reduce disputes, and create a smoother landlord-tenant relationship.
Clear heads of terms are not just a formality they are a practical safeguard against conflict and a roadmap for a well-structured lease.
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Useful External Links
https://www.gov.uk/government/collections/business-leases-and-commercial-property
