If you are looking 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 that contains the commercial terms of your lease. It outlines both the landlord’s and your rights and obligations for the lease, including the duration of the lease, estimated outgoings and the detail of the lease proposal. This article will explain:
- what is a lease heads of agreement;
- when it is binding; and
- what important 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 with caution and only when you are clear on all aspects of the lease terms. The heads of agreement should be very detailed to leave little room for unforeseen negotiation about the lease.
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.
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 any further terms, the contract should state these in addition to any renewal terms.
The lease agreement should clearly state if rent is calculated on an annual basis 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.
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 each year or the increases in outgoings from year to year. With retail leases, the landlord is required by law to provide a breakdown of the estimate of outgoings in a disclosure statement.
It is important to document any works to be carried out and the procedure for obtaining consent for potential works. You should also find out what the costs are 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 manual.
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. It is, therefore, worthwhile to ensure that both parties agree to the commercial lease terms beforehand, to prevent extensive negotiations on the lease afterwards.
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 as to what circumstances require you to “top up” the amount and the timeframe for the landlord to return the security amount to you.
Make sure you agree on the:
- 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 are planning to lease. It is worthwhile to list all insurance policies that you are willing to take out in the heads of agreement.
10. Assignment and Subletting
You should be clear on the landlord’s preconditions to assign your lease during the lease period and whether you are able to 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 is different to subletting where you only transfer part of your rights to the lease. If you require the ability to sublease your premises, you should ensure that the conditions for this are reasonable. Some states do not regulate subleasing arrangements.
Be aware of any requirements to carry out redecoration or refurbishment work during the term of the lease. This obligation is standard in leases, but it is worthwhile to understand, before you enter the lease, the extent of this obligation.
The more extensive your refurbishment obligation is, the more costly this will be, and it is in your best interest to try to limit the scope of such an obligation.
Entering into a heads of agreement to lease premises requires some thought and careful negotiating to ensure that you are getting a good deal for your lease. It is the first step of entering into a long-term, binding contract, and it is, therefore, worthwhile to canvas all of the critical issues upfront. If you are unsure of your rights as a tenant or would like assistance with your lease negotiations, get in touch with LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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