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Leases: the brief history and the importance of Heads of Terms

The Past

In the “good ol’ days” a lease was a fairly straightforward document. It likely ran to no more than 20 pages, tenant covenants were few and landlord covenants even fewer, most weren’t registrable at the Land Registry and stamp duty (as-was) often wasn’t payable or was minimal. It was executed by a common seal, director and secretary, or individual with a witness in wet ink. And when it came to rent, there was a principal or basic rent paid which was reviewed to open market every 5 years – simple!

Oh, how things have changed! Now, it is not uncommon for leases to run to nearly 100 pages, contain incredibly lengthy, precise and complicated tenant covenants, impose much heavier burdens on landlords, almost always require some sort of registration and impose a fairly hefty tax burden in the form of stamp duty land tax (SDLT). Execution can be in wet ink, using the Mercury protocol or via an e-signing platform such as DocuSign, and sometimes all three. And rents can now comprise turnover, reviews can be CPI, RPI, open market or fixed (or a combination of any or all of them), with caps and collars and everything in between. And let’s not forget all of the complexities that can be found in an agreement for lease!

Who’s to blame?

Some may blame the lawyers for these changes, others might point the finger at surveyors/agents; some may say it is successive governments and others may lament that the changes reflect that life is more complicated than it once was. But it is certainly the case that, now more than ever, the professionals involved in a lease and their clients must work closely together to ensure that the final document reflects the intentions of the parties.

The Importance of Heads of Terms

The starting point for this process is almost always a good set of Heads of Terms (HoTsrea) which accurately reflect the negotiations of the parties. Whilst HoTs are usually non-binding contractually, they are nevertheless a vital tool for ensuring that a deal ends up in the place the parties expected. In simpler leases, it is not usually necessary to involve the lawyers in agreeing HoTs (although there is no harm in doing so) but with more complicated deals, it is very useful to do so. There may be a tax implication to a particular quirk of the deal, a better way to structure it legally which saves time, money or both. Or it may be just important to ensure that the lawyer understands and can therefore draft the commercial terms that have been agreed.

Understanding is never more important than with the complex rent arrangements described above. Words can be read in different ways and interpretation can make a huge difference to the eventual outcome. It is always far better to get it right first time (even if one party may seem to get an advantage from an “error”) since a claim for rectification may otherwise follow if it is found that there has been a common mistake between the parties as to the commercial terms agreed.

Worked examples and formulae

So, when it comes to rent, we are increasingly including a mathematical formula and worked example in our leases to illustrate what the parties intend. Both should of course reflect the drafting but, in the case of an error in the same, it would make it much easier for rectification to be agreed (either by both parties voluntarily or one party through the courts).

But, even more than just including a worked example in the lease, we are now recommending to clients that one be appended to the HoTs so that any misunderstanding is “nipped in the bud” right at the outset. That same example can then be used in the lease itself and will make it much easier for the lawyer to draft the necessary provisions and will usually lead to quicker negotiations. A formula is always good to include in any worked example since there is much less likely to be a difference of opinion over interpretation of that than just relying on words.

Going forward

Clearly, worked examples will not be necessary in leases with simple rent arrangements but for anything a little bit more complex or “off the wall” they are vital to ensuring the best and fairest outcome for the clients.

We are always happy to discuss provisions in HoTs with our clients and our agent contacts to ensure that we get the right deal, first time, and that negotiations are concluded swiftly and efficiently. We see it is a part of the unlimited partnership with our clients that extends beyond providing just pure legal services but to a more personal, clever and enterprising approach. Please feel free to contact us to find out more.

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