In Short
- A lease heads of agreement outlines key commercial terms for leasing a premises and may be binding or non-binding.
- Essential terms include premises details, rent, outgoings, and legal costs, along with works, security, and insurance requirements.
- Ensure all terms are agreed before formal lease documents are signed.
Tips for Businesses
Before entering a lease heads of agreement, confirm whether it’s binding or non-binding. Clarify essential terms, such as rent, security deposits, and outgoings, to avoid unexpected costs. Review all provisions, including refurbishment and subletting, and seek legal advice to ensure your interests are protected throughout the lease term.
If you want to lease a premises, you will need a lease heads of agreement to formalise your lease. A lease heads of agreement is an important document containing your lease’s commercial terms. It outlines both the landlord’s and your rights and obligations for the lease, including the duration of the lease, estimated outgoings and the details of the lease proposal. This article will explain:
- what is a lease heads of agreement;
- when it is binding; and
- what essential terms you should include.
What is a Lease Heads of Agreement?
A lease heads of agreement is a summary proposal of the commercial terms that both the landlord and tenant would like the lease document to include. An important starting point is whether it is stated to be binding or non-binding. Most landlords offer non-binding lease heads of agreement with the condition that the proposal will not become binding until both parties execute formal lease documents. If negotiations break down, this arrangement is more favourable for you as a tenant, as the most you would lose is the deposit.
You should enter into a binding lease heads of agreement cautiously and only when clear on all lease terms. The heads of agreement should be very detailed to leave little room for unforeseen lease negotiations.
Key Terms in a Lease Heads of Agreement
1. The Premises
This term should include:
- the street address;
- the proposed or actual area of the premises; and
- any car parking space or storage area.
2. Commencement Date
This term can be one of two things. It can either be the specified date the parties have agreed to enter into the lease, or it can depend on a trigger event.
For example, entering the lease once either party completes works on the property.
3. Term of the Lease
This term details the length of the lease term. Retail premises in most states have a minimum five-year term unless the tenant signs a certificate to waive their right to a minimum term. If the landlord offers further terms, the contract should state these and any renewal terms.
4. Rent
The lease agreement should clearly state if rent is calculated annually or based on the area of the premises. If the area of the premises dictates the rent amount, the contract should clearly state that the calculation is subject to a survey. It should also state who is to pay for the cost of the survey.
5. Outgoings
Outgoings are the landlord’s expenses of running the building. Examples include council rates and cleaning. The lease heads of agreement should state the amount you will pay for outgoings. This could be a set proportion of the outgoings yearly or the increases in outgoings from year to year. With retail leases, the landlord is legally required to provide a breakdown of the estimate of outgoings in a disclosure statement.
The landlord should provide an exhaustive list of costs considered outgoings. This ensures such items are clarified before the lease is issued.
6. Works
It is essential to document any works to be carried out and the procedure for obtaining consent for potential works. You should also determine the costs to get the landlord’s consent for potential works. In addition, you should be clear on whether the landlord will require you to adhere to any prescribed standards, such as a fit-out guide.
You will also want to clarify if the landlord completes any work before you enter the premises or conduct your fitout.
A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.
7. Legal Costs
Most retail lease legislation prohibits the landlord from recovering legal costs from the tenant for any lease preparations. However, some states allow the landlord to recover the cost of negotiating and amending the lease term, including any registration of lease costs. Therefore, it is worthwhile to ensure that both parties agree to the commercial lease terms beforehand to prevent extensive negotiations on the lease afterwards.
8. Security
The landlord will require you to provide some form of guarantee for your performance of the lease, either in the form of a:
- security deposit;
- bank guarantee; or
- personal guarantee.
If you have to provide financial security, you should be clear about what circumstances require you to “top up” the amount and the timeframe for the landlord to return the security amount to you.
9. Insurance
Make sure you agree on the following:
- insured amount;
- type of insurance; and
- policy you require.
Quite often, a lease document has standard provisions for insurance that may not suit the particular property you plan to lease. It is worthwhile to list all insurance policies you are willing to take out in the heads of agreement.
10. Assignment and Subletting
You should be clear on the landlord’s preconditions for assigning your lease during the lease period. Ensure you understand if you can comply with these preconditions. Assigning a lease is when you transfer all of your rights to the lease to someone else. For retail premises, the retail legislation governs the assignment provisions.
Assigning the lease differs from subletting, where you only transfer part of your rights to the lease. If you require the ability to sublease your premises, you should ensure reasonable conditions. Some states do not regulate subleasing arrangements.
11. Refurbishment
Be aware of any requirements to carry out redecoration or refurbishment work during the lease term. Although this obligation is standard in leases, it is worthwhile to understand the extent of it before you enter the lease.
For instance, are you required to repaint the premises after a set time, or will it be at the landlord’s discretion? Will you also be required to update your fit-out or replace the floor covering?
The more extensive your refurbishment obligation, the more costly it will be. It is in your best interest to limit its scope.
Continue reading this article below the formKey Takeaways
A lease heads of agreement outlines key commercial terms between a landlord and tenant before formalising a lease. It is important to clarify whether it is binding or non-binding. Ensure it includes essential terms such as rent, outgoings, security, and works to be done.
If you require assistance understanding your lease heads of agreement, our experienced leasing lawyers can help as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
A lease heads of agreement can be either binding or non-binding. It only becomes binding when explicitly stated or when formal lease documents are executed by both parties.
The landlord may require a security deposit, bank guarantee, or personal guarantee to ensure the tenant’s performance under the lease.
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