11 Key Terms in a Lease Heads of Agreement

When searching for a brick and mortar premises to lease, the leasing agent is often your first point of contact. You would have spoken on the phone to firm up your lease proposal, the duration of your lease and the estimated outgoings. After this, you may wonder what else? Below, we explain a lease heads of agreement, when it’s 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 only offer non-binding lease heads of agreement with the disclaimer that the proposal will not become binding until both parties execute formal lease documents. This arrangement is favourable for tenants if the negotiations break down, as the most they would lose is the deposit.

Parties should enter into a binding lease heads of agreement with caution and only when they are clear on all aspects of the lease terms. In this situation, the heads of agreement must be very detailed, leaving little room for unforeseen negotiation about the lease.

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 be the specified date the parties have agreed to enter into the lease, or it can depend on a trigger event such as the landlord completing its works.

3. Term of the Lease

How long will the lease be? 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 also state this as well as any renewal terms.

4. Rent

The rent amount should clearly state if it is calculated on an annual basis or based on the area of the premises. If the area of the premises dictates the rent amount, then the contract should clearly state that it is subject to a survey and also state who is to pay for the cost of the survey.

5. Outgoings

How will you pay for outgoings? Will this be based on your proportion for each year or are you only required to pay for the difference/increase 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.

6. Works

It is important to document any works to be carried out and the procedure for consent. Will the landlord require you to adhere to any prescribed standards such as a fit out manual? What are the costs involved to get the landlord’s consent?

7. Legal Costs

Most retail lease legislation prohibits the landlord recovering legal costs from the tenant associated with 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 parties agree to most of the commercial lease terms beforehand, to prevent extensive negotiations on the lease document 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 guarantees. 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 to you the security amount.

9. Insurance

Make sure you clearly agree on the insured amount, the type of insurance and the policy you require. Quite often, a lease document has standard provisions for insurance that may not align with 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 can comply with these preconditions. For retail premises, the retail legislation governs the assignment provisions. However, some states do not regulate subleasing arrangements. If you require the ability to sublease your premises, you should ensure that the preconditions for this are reasonable.

11. Refurbishment

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 agree at the precontractual stage the extent of the refurbishment. For instance, are you only required to repaint the premises at certain intervals 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 is, the costlier this would be, and it is in your best interest to try to limit the scope of such an obligation.

Key Takeaways

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. After all, it is the first step of entering into a long-term binding contract so it is worthwhile to canvas all of the important issues at the forefront. If you are unsure of your rights as a tenant or would like assistance with your lease negotiations, get in touch with our experienced commercial leasing lawyers on 1300 544 755.