Note: this article refers to Least; now Kato.

Heads of terms are an important part of any commercial real estate transaction. They show a commitment from both sides in progressing a deal, help outline the commercial terms agreed and also include an array of many other possible clauses and inclusions.

And herein is where the problem lies - Heads of Terms can be incredibly inconsistent - in length, style, format, language.   As a result, occupiers involved in commercial real estate transactions may encounter vastly different experiences each time they engage in the leasing process.

At Least, whilst we acknowledge the importance of Heads of Terms, we believe there is room for improvement.  Having read many, many sets of Heads of Terms - we think we have a pretty good understanding of what good might look like. So here is our take on things.

Content

What to include and what to omit causes much debate. Agents often want the terms to remain purely commercial - this is  where they can add value through negotiation and get the best result for their client. However, if clauses  are omitted from the outset  the legal process can become protracted. The lawyers may need to take multiple instructions leading to numerous all-parties calls and everyone just wishing they had discussed it upfront - especially regarding the operational side of occupation. Conversely, too much detail in the Heads of Terms can lead to a negotiating stalemate over small items with no-one being able to see the bigger picture and getting hung up on wording that is for the lawyers to agree.

Wording

At Least, we think there is no need for legal jargon at the Heads of Terms stage. It is important that all parties have a clear understanding of what they are agreeing to. Keeping clauses concise, clear and written in plain English we think is a no-brainer. That’s why we have built a comprehensive clause bank to ensure consistency in language and tone which all of our landlord and agent customers have access to.

Landlord teams can ensure that all their business requirements are always included in their standard Heads of Terms - whether that be green clauses, Sanctions wording, specific requirements on assignment or any other business critical clauses that cause delay down the line.

Format

Head of Terms have historically been drafted in Microsoft Word, sent to the other party who then marks them up - usually through track changes - before sending back to the other side. The process is repeated, often going through several rounds of back and forth. In Word doc format, track changes can easily lead to version control issues and confusion, whose red/green/purple pen is who’s? This should be better and is one of the reasons why we built a digital version of the Heads of Terms. It means that negotiation history on each clause can be tracked and is totally transparent to all parties. It is impossible to miss a clause  and the occupier is guided through the terms with helpful explainers. Additionally, if a clause is non-negotiable it  can be locked - the landlord's position is clear, the process does not become combative and no time is wasted!

We think that these are the three key areas to focus on when reviewing your Heads of Terms. Reflecting on their initial purpose we must remember that Heads of Terms is a good opportunity to negotiate on the commercials and key terms, establish a partnership and commit to working together.  It is therefore important to get right, the risk at this stage is high - no written commitment has yet been made and both parties are still in their courtship - with an opportunity to walk away at any point if the situation becomes too combative or they don’t like what they see. Through making simple changes to content, wording and format Landlords can do faster, better leasing and have happier occupiers.

To find out more about how Least can help with your Heads of terms please get in touch!

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