In commercial and retail leasing, it is common practice for parties to negotiate key commercial terms and document these in a leasing proposal or heads of agreement, which will form the basis of the final leasing documentation.
Heads of agreement and leasing proposals are useful tools in providing a framework for smoother negotiations in leasing transactions however can be prepared in a manner which may result in unintended consequences.
Generally, heads of agreement are not intended to be legally binding on the parties, however, it is important to be mindful of particular circumstances where it maybe the intention of one or both parties for an agreed term to be legally binding.
Some key terms which the parties should ensure are incorporated as legally binding are:
- Confidentiality: The proposal or heads of agreement should include an obligation for the parties to keep the terms and conditions of the proposal or heads of agreement confidential, unless the other party provides express consent to a specific disclosure.
- Legal costs/deposit: The proposed tenant should be required to provide a deposit (which can subsequently be credited to the rental account if the transaction proceeds to final documentation) to be refunded, less the landlord’s solicitor’s costs, where the tenant withdraws without reasonable cause.
Wording to achieve this the heads of agreement or leasing proposal should:
- specify that it not intended to be legally binding and is subject to the relevant documentation being prepared, negotiated and executed parties; and
- carve out the terms which are intended to be legally binding.
It also needs to be noted that under the terms of the Leases (Commercial and Retail) Act 2001, a landlord may be prevented from recovering costs associated with the preparation of any lease documentation.
For this reason, it is important to seek legal advice on the terms and enforceability of a heads of agreement or leasing proposal prior to signing and it is equally important not to record anything in the document that you are not prepared to be bound by.
Terracon Legal is well versed in providing advice on all aspects of commercial and retail leasing. Please reach out to us if you wish to discuss this further or require assistance in reviewing a heads of agreement or leasing proposal.
Note: this is not legal advice and should not be relied upon (as it is general in nature, and will differ depending on factual circumstances). Legal advice should only be relied upon if Terracon Legal have been formally engaged via a cost agreement to provide such advice, and it is given with specific facts and context provided.