What are Heads of Terms?
Heads of Terms (HOTs) is a phrase that you might come across when entering into a commercial property transaction, such as the grant of a lease or the sale or purchase of a property, or when entering into a corporate transaction such as the sale of a business. Simply put, HOTs is a document that sets out the key terms of the transaction which are agreed between the parties at the negotiation or 'pre-contract' stage.
Some of the most common terms that you can expect to find in HOTs include the following:
- The parties and their agents and solicitors;
- Extent of the property to be sold, purchased or leased including the use of the property as authorised by planning permission. This will sometimes be paired with a plan;
- Purchase price or annual rent and frequency of rent reviews;
- Break clauses;
- The deposit payable, if any;
- The VAT position;
- Service or estate management charges;
- Rights to be granted to a tenant or retained by a seller;
- Whether the transaction is conditional on an event such as the grant of planning permission; and
- Timescales.
This is a not an exhaustive list of what must be included, but details the key provisions we see time and time again being included in HOTs. It is for the parties of the transaction to decide what they consider to be a 'deal-breaker' when negotiating HOTs.
Do I need Heads of Terms?
Whilst HOTs are not essential to a transaction, there are a number of reasons why we would recommend spending the time to negotiate HOTs before instructing a solicitor to assist with your commercial property transaction.
One of the key benefits for you or your company is that this can ultimately save you legal costs. If the key terms are negotiated before solicitors become involved or begin to draft the sale contract or lease, it means you avoid the back and forth of your solicitor taking instructions from you to provide to the other party's solicitor who must then also take instructions. The solicitor can review the HOTs and see that the term has already be negotiated therefore giving them the authority to include this in the draft contract for sale or lease. Not only does this mean there is less correspondence which you can be charged for but it can also speed the transaction up significantly as your solicitor can draft the sale contract or lease without having to revert back for information.
Negotiation of HOTs can help to identity any contentious issues that could mean the transaction would be aborted later down the line when costs have already been incurred. For example, if the seller of the property wishes to retain a right of access to their neighbouring property over the land and you are opposed to this to the extent where you do not wish to continue with the transaction this can be discovered at the outset. Not only does this save you costs but also the time and upset of having to put your property back on the market or find an alternative property to purchase or lease, which is suitable for your business needs.
When drafted correctly HOTs will not create a legally binding relationship which gives the parties peace of mind that they are not agreeing to contractual obligations before the involvement of their solicitor, but will simply help to create focus and structure for the drafting of the legal documents moving forward.
In order to ensure that your HOTs are not deemed as legally binding, we would recommend making it clear that any intentions are 'subject to contract'. However, it is likely that you will be using an experienced property agent who is able to assist with agreeing the HOTs without creating a legally binding agreement. If you have agreed a private sale without the involvement of an agent your solicitor will be able to assist you in drafting HOTs, although you will incur legal costs for this service it is still likely to reduce negotiations between both party's solicitors when it comes to the draft contract or lease and in turn speed up the process whilst keeping costs to a minimum.
Whether you are buying or selling a commercial property or taking or granting a lease of a commercial property we can assist you. Click here for more information on the commercial property services we offer.
Whatever the nature of the transaction, we're here to help. To find out more or discuss your individual circumstances in further detail, contact us on 01603 693500 or email us using the 'Make an Enquiry' form on our website.
*This article is provided for general information purposes only and does not constitute legal advice or other professional advice.
