Heads of Terms Will Be Critical in Assessing Post-COVID Office Space

Lawyer Monthly hears from Karen Mason, co-founder of Newmanor Law, on how Heads of Terms will be come essential as businesses look to reacquire office space.

Whilst the Government has detailed its roadmap out of lockdown, as yet there has been no guidance issued for office workers returning to their workplaces. Not only will the return to a normal office environment depend on each business, but on four tests that must be satisfied.

The tests include the success of the vaccine deployment programme and evidence to show the vaccines are effective in reducing hospitalisations. Also, it will be essential to keep infection rates below the level that would put unsustainable pressure on the NHS and manage variants of concern.

This all points to the remaining working-remotely or furloughed staff returning to workplaces no sooner than 17 May, which gives occupiers time to consider renegotiating their lease terms or trying to agree a new lease to redefine their situation.

Despite the call from some like Goldman Sachs CEO David Solomon, who believes all workers will return to the office full time, many other businesses have accepted that remote working will form part of the working week, which will lead them to question their utilisation of space. Some industry commentators believe now is the right time to downsize and change the office for ever, using a hot-desk approach with team members in the office on different days, whilst others looking to space their people apart, may ironically need bigger offices or more locations.

Critical for businesses in the post-COVID world will be the need to secure a good long-term deal, with the different needs of each business requiring comprehensive Heads of Terms to tie down what is being agreed, whilst outlining the timetable and obligations of the parties during the negotiations.

Critical for businesses in the post-COVID world will be the need to secure a good long-term deal.

Heads of Terms provide a written record of the main terms of a deal, but typically they are resolved before involving solicitors, which can cause problems and delays later. When well-drafted they will provide the framework for the deal and cover how it should be executed. They will also serve later as a checklist that all agreed terms have been included in the documentation.

Experience counts when drafting Heads of Terms

If Heads of Terms are drafted without advice from an experienced real estate lawyer at the outset there is the very real possibility that a long list of questions will be raised when the solicitors do get involved, which will only delay matters. The process of agreeing detailed Heads of Terms is also a very good test of the parties’ seriousness in completing the transaction and can be a good indication of how each party will do business.

The Heads of Terms will typically include points such as the price of the deal, the identities of the parties involved, the basic purpose of the contract, the terms of the contract or transaction, confidentiality agreements and any protection for the parties should the transaction not proceed.

The major reason for seeking expert advice at the outset is to ensure the Heads of Terms do not become legally binding by accident, since detailed provisions will be included in the contract documentation.

Using the phrase ‘subject to contract’ will help, but in many cases, the actions of the parties after the Heads of Terms have been drafted, will have as much impact on whether the provisions are deemed legally binding as the actual wording of the provisions included. For example, should parties start to deliver the obligations set out in the Heads of Terms before a legally binding contract has been agreed, the very act of doing so may be deemed an indication that these obligations are accepted as being legally binding.

For a lease agreement, these provisions might include:

• Details of the property, its address and whether it is freehold or leasehold.
• Whether the transaction deals with lease of the entire property or just part.
• Details of professional advisers involved – solicitors, accountants, agents etc.
• The parties involved, including any guarantor required, with names, contact details and whether the property is being let to a limited company or an individual.
• The length of any proposed lease term.
• Level of security of tenure proposed – is it covered by the Landlord and Tenant Act 1954?
• Will the lease include a Break Clause and if so, what conditions will trigger it.
• Heads of Terms will itemise the amount, frequency, and method of payment of any rent.
• The frequency of any rent reviews, and the method of review.
• Any rent-free period if the tenant is fitting out the property before occupying formally.
• The amount (if any) of any other incentives to take the lease.
• Whether a rent deposit is payable and if so, how much and when it will be reimbursed.
• Who is responsible for paying building insurance and if it is included as part of the rent.
• The purpose the property can be used for and whether the tenant can change it in future.
• Whether the tenant can sublet the property or assign the lease to a third-party.
• Whether each party is responsible for their own costs.
• Whether the tenant is permitted to carry out alterations.
• A timescale detailing how long the transaction is expected to take.

The list is an extensive one, but the more detail included at the start the shorter the negotiations should be. One tip to try and help stop further negotiations becoming protracted is to add a target completion date into the Heads of Terms.

Not binding but an invaluable guide if tightly drafted

It is vital to ensure that any suggested changes in the Heads of Terms are reflected in the documentation itself, and the key to avoiding provisions accidentally slipping into legally binding status is to move to drawing up final contracts as quickly as possible.

Heads of Terms will become increasingly important in commercial property deals, as they provide the framework for efficient and successful deal execution. Once the Heads of Terms have been agreed they will act as a guide and a benchmark for measuring progress.

It is important to understand the benefits of engaging specialist legal advisers at the outset, who recognise Heads of Terms are not intended to lay traps for the unwary but are all about preparing for a quick efficient deal execution, which should satisfy everyone concerned in the negotiations.