Commercial Leasing
Why and When Should You Use a Lease Heads of Agreement?
A Lease Heads of Agreement is a practical document used to record the key commercial terms of a proposed lease before the formal lease is prepared.
Introduction
A commercial lease can involve significant commitments for both landlord and tenant. Before the final lease is prepared, the parties often need a clear written record of the main commercial terms they have agreed, or are close to agreeing.
This is where a Lease Heads of Agreement can be useful.
A Lease Heads of Agreement sets out the principal terms of a proposed lease before the formal lease document is drafted. It can help landlords, tenants, agents and solicitors confirm the deal structure, identify unresolved issues and reduce the risk of misunderstandings later in the transaction.
At a Glance
- Document: Lease Heads of Agreement
- Purpose: Records the key terms of a proposed commercial lease
- Used by: Landlords, tenants, agents, solicitors and business owners
- When used: Before the formal lease is prepared and signed
- Format: Editable Word document available from Precedents Online
What is a Lease Heads of Agreement?
A Lease Heads of Agreement is a short-form document that records the key terms of a proposed lease transaction.
It will usually identify the landlord and tenant, describe the premises, and set out the main commercial points such as:
- the proposed lease term;
- any option period;
- the commencement date;
- rent and rent review arrangements;
- incentives or rent-free periods;
- outgoings and operating costs;
- permitted use of the premises;
- security bond, bank guarantee or deposit arrangements;
- insurance requirements;
- fit-out obligations;
- special conditions; and
- any matters that remain subject to final agreement.
Why use a Lease Heads of Agreement?
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1. It records the commercial deal early
Commercial lease negotiations can move quickly. A Lease Heads of Agreement helps record the commercial deal points in one place so everyone is working from the same position.
2. It helps avoid misunderstandings
A heads of agreement can reduce confusion about rent, outgoings, fit-out responsibilities, incentives and other important lease terms before the formal lease is prepared.
3. It gives solicitors clear drafting instructions
Once the parties are ready to proceed, the formal lease will usually need to be prepared. A Lease Heads of Agreement provides a practical set of instructions for preparing that lease.
4. It helps identify unresolved issues
Not every issue will be finalised at the start of a lease transaction. A heads of agreement can record what has been agreed and clearly flag what still needs to be resolved.
5. It can save time and cost
Preparing a full lease before the main commercial terms are settled can be inefficient. A heads of agreement helps narrow the issues first.
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When should you use a Lease Heads of Agreement?
A Lease Heads of Agreement is commonly used after the key commercial terms have been discussed but before the final lease has been prepared and signed.
It may be useful where:
- a landlord and tenant have reached agreement in principle;
- the lease terms are still being negotiated;
- the parties want to confirm the main commercial terms before incurring further legal costs;
- a tenant needs written terms for finance, internal approval or business planning;
- an agent needs a signed record of the agreed commercial terms;
- a solicitor needs clear instructions to prepare the lease;
- the transaction involves incentives, fit-out works or option periods;
- the premises are office, retail, industrial or commercial premises; or
- the parties want to identify what is agreed and what remains subject to final documentation.
Is a Lease Heads of Agreement legally binding?
A heads of agreement can be drafted as binding, non-binding, or partly binding. The legal effect will depend on the wording of the document, the intention of the parties and the surrounding circumstances.
For example, the parties may intend that most commercial terms are not binding until the final lease is signed, but that certain clauses are binding immediately. These may include confidentiality, exclusivity, payment of costs or obligations to act in good faith during negotiations.
Because of this, the document should clearly state which parts are intended to be binding and which parts are not.
Common mistakes to avoid
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Treating it as “just a formality”
Although it is a preliminary document, it may still have legal consequences. It should be reviewed carefully before signing.
Failing to say whether it is binding
If the document does not clearly state whether it is binding, disputes can arise later about whether the parties were already legally committed.
Leaving out key commercial terms
A vague heads of agreement may not give the parties enough certainty to prepare the final lease efficiently.
Using the wrong type of document
A general heads of agreement may not cover the specific issues that arise in leasing transactions. A lease-specific document is usually more appropriate.
Not getting legal advice when needed
Legal advice may be required, particularly where the lease is high value, long term, subject to retail leasing legislation or involves complex fit-out or incentive arrangements.
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Lease Heads of Agreement vs formal lease
A Lease Heads of Agreement is not the same as the final lease.
The heads of agreement records the main terms and provides a framework for the transaction. The formal lease contains the detailed legal rights and obligations that will govern the landlord and tenant relationship.
In most cases, the Lease Heads of Agreement is the starting point. The formal lease is the document that completes the transaction.
Download a Lease Heads of Agreement template
Precedents Online offers a professionally drafted Heads of Agreement for Lease precedent for Australian practitioners.
The document is supplied as a fully editable Microsoft Word document and is designed to record the key commercial terms agreed between a landlord and prospective tenant before the formal lease is prepared.
It can assist with commercial lease negotiations, clarify the agreed terms and provide a useful framework for preparing the final lease documentation.
Final thoughts
A Lease Heads of Agreement is a practical document that can help bring structure, clarity and momentum to commercial lease negotiations.
Used properly, it can record the commercial deal, identify unresolved issues and guide the preparation of the final lease. However, it should be drafted carefully, particularly in relation to whether it is intended to be binding, non-binding or partly binding.
For landlords, tenants and legal practitioners, it is a useful step between negotiation and formal lease documentation.