It is common practice for you and your landlord to enter into a heads of agreement (HOA) before signing a lease. Both parties have the discretion to choose whether to sign a HOA. However, the legally binding nature of an HOA is only sometimes certain. A binding HOA may legally require both parties to enter into a lease.
The most important factor when determining whether an HOA is binding or not is your and your landlord’s intention when signing the document. This article will examine:
- when HOAs are binding;
- the benefits of a non-binding HOA; and
- practical tips that tenants should bear in mind when signing an HOA.
What is a Heads of Agreement?
Generally, an HOA for commercial or retail premises is used by the lessor and the lessee to negotiate critical terms before entering into a binding and enforceable lease. An HOA is a preliminary document you would sign before a lease. Typically, your landlord would provide this to you, the tenant. While they are not mandatory, HOAs are a fairly common practice. Specifically, an HOA will usually set out:
- the commercial terms of the proposed transaction, including the proposed lease term;
- any option terms;
- key dates; and
- financial terms (e.g. rent, any rent incentives and rent review).
If an HOA is binding, both parties will have legal obligations to enter into a lease on the commercial terms of the HOA. This means it will be difficult to withdraw from entering the lease once you sign the HOA. Therefore, working with a lawyer when reviewing your HOA is essential.
When is a Heads of Agreement Binding?
Usually, HOAs are expressly clear about whether or not the agreement is binding, and you should look out for any terms that state this. However, if the HOA does not account for this, it is far less clear-cut.
Where the HOA does not specify, courts will typically focus on the intention of the parties. The court may determine intention by looking at the:
- conduct of the parties both before and after signing the HOA; and
- written terms of the HOA itself.
As such, it is important to consider whether the HOA has any implications of it being binding. Even when it does not state if the HOA is binding, it is always important to talk to a leasing lawyer prior to signing the HOA.
Continue reading this article below the formBenefits of a Non-Binding Heads of Agreement
In general, it is more beneficial to both you and your landlord if the HOA is non-binding. The agreement should expressly state this fact to allow you flexibility down the track.
You may wish to pull out of signing the lease after you have signed your HOA for various reasons, such as finding:
- more appropriate premises for your business elsewhere;
- that the landlord is challenging to communicate and negotiate with; or
- issues with the premises you previously did not notice.
This guide will help you to understand your options when you purchase a business with leased premises.
Practical Tips for Signing a Heads of Agreement
Before signing an HOA as a tenant, you should make sure that:
- both you and the landlord are clear about your intentions for the document. If you do not intend for it to be binding, you should confirm this with the landlord before signing;
- you are clear on the agreed commercial terms; and
- your HOA includes any essential terms or ‘dealbreakers’. This will minimise the need to negotiate these terms later down the track or pull out of signing the lease if you cannot do so.
Key Takeaways
The key to whether or not a heads of agreement is binding is the intention of the two parties. However, this test is subjective, and the answer is only sometimes clear. The best approach with a heads of agreement is to ensure that, whatever your intention, you expressly state it. This can help you to minimise possible disputes down the track.
If you have any questions about your obligations as a tenant, get in touch with our experienced leasing lawyers, who can assist 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 on 1300 544 755 or visit our membership page.
Frequently Asked Questions
The lessor and the lessee use an HOA for commercial or retail space to negotiate the key commercial terms before entering into a binding and enforceable lease.
It depends on multiple factors. If the HOA specifies that it is a binding agreement, both parties will be bound by it.
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