What is a Heads of Agreement?

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If you have leased a commercial property previously, or you are currently looking for one, you’ve probably heard the Leasing Agent refer to the “Heads of Agreement”. So what is a Heads of Agreement and what should it include?

Also known as a Letter of Offer or a Lease Proposal (yes, no wonder you’re confused!) the Heads of Agreement is the initial agreement which comes before the Lease outlining the commercial terms and conditions of the Tenant’s proposed occupancy of the Premises. The Heads of Agreement is very important, as the Lease must reflect what is in it and forms the backbone of the Lease agreement.

The Tenant will normally receive the Heads of Agreement from the Landlord, however the Tenant can prepare their own Heads of Agreement outlining the terms of the Lease they’d be prepared to endorse, and provide to the Landlord for their consideration.

Things the Heads of Agreement should include are as follows:

  • Landlord and Tenant details including any ABN/ACN if applicable and the relevant party’s registered address. These should be the correct entities that will hold the lease.
  • Detailed description and address of the Premises including area m2.
  • Lease term and any further terms (options) along with the final date the Tenant can notify the Landlord that they intend to exercise their option.
  • Lease Commencement Date. Be careful with this as inevitably a lease negotiation always takes longer than anticipated and you don’t want to be left paying for the property before you take occupation, or you don’t want it eating into any of your rent free period.
  • Rent amount and any rent free period if applicable.
  • Rent review method and if there is a market review, whether it is subject to a ratchet clause (whether the market rent can be lower than the current rent).
  • Tenant’s proportion of outgoings and what the outgoings include.
  • Permitted Use of the Premises. This is important, as it will provide an overview of your use of the premises.
  • Insurances and who is responsible for what.
  • Legal fees – Each party is to pay their own legal fees. One of our biggest gripes is that a Landlord will often request that the Tenant pay the Landlord’s legal fees (this is not permitted if you are a tenant under the Retail Leases Act)
  • Security Deposit/Bank Guarantee amount. A Landlord will always want you to provide a Bank Guarantee which is fair, however what’s often not fair is the amount they want you to provide and the expiry date.
  • Make Good obligations. This is a really important item to make sure you touch on in the Heads of Agreement. Depending on the type of property i.e. industrial/office etc. there are different standards for what make good obligations a Tenant should be responsible for.
  • Special Conditions should also be included if there are any. Often it will be agreed with the Landlord that the Tenant can have early access to undertake any fit out works etc. so that should all be included here if applicable. Also if there are Tenant or Landlord works to be undertaken then they need to be included in the Heads of Agreement.

If you’re unsure about the terms within the Heads of Agreement being fair, we can review these for you prior to signing. We will read through your Heads of Agreement and provide you with professional advice on market rental rates, rent-free and incentives, compliance with the Retail Leases Act (if applicable) and any other items we feel should be negotiated in your favour. Contact us today to find out more about this service.

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