Landlords will often set out the key commercial terms of retail and commercial leases for a prospective tenant in a signed document, known as a Heads of Agreement or HOA, Lease Offer, or Letter of Offer.
A Heads of Agreement is often prepared by real estate agents, providing a helpful framework which underpins the intention of the parties to enter into a lease arrangement.
This document will vary in terms of formality and substance, according to the parties’ particular requests and concerns. For example, if the tenant requires a fit out in the premises or the landlord requires special conditions then additional documents may be necessary.
A Heads of Agreement will usually contain the following details:
When preparing or asking the real estate agent to prepare the Heads of Agreement, the landlord should consider the following:
From a tenant’s perspective, it is important to consider if the premises is right for the tenant’s needs. This includes due diligence regarding:
A tenant should also review the terms of the payment of the deposit for the lease and whether it is refundable to the tenant if the lease does not proceed.
The Heads of Agreement or HOA is likely the first document signed by both the tenant and landlord as a basis for the negotiation of key terms before entering into a formal lease arrangement. As such, the Heads of Agreement may not reflect the entire agreement between the parties and is generally not intended to be legally binding on the parties.
However, the Heads of Agreement may be drafted in a manner that is legally binding, so long as it satisfies the requirements of a valid contract. It is important for the parties to consider if they want the Heads of Agreement to be legally binding.
If the parties would like the Heads of Agreement or HOA to be legally binding then it should clearly state this and must incorporate all the key terms of the lease in the document.
Other indications that the Heads of Agreement is legally binding include:
If there are any terms which are not yet certain or included in the Heads of Agreement (HOA), ensure that the HOA provides the machinery for determining those terms.
Similarly, if the parties do not intend for the Heads of Agreement to be legally binding on the parties, it is recommended that there are express and clear terms to this effect in the Heads of Agreement, such as “subject to the parties entering into the lease documents” or “subject to the terms of the lease”.
The parties may choose to make some of the terms of the Heads of Agreement legally binding at the time that it is signed, such as confidentiality and payment of deposit terms. If so, this should be clearly set out in the Heads of Agreement.
If you are not sure if the Heads of Agreement is legally binding, it is important to seek legal advice on the terms and enforceability of the Heads of Agreement prior to signing it.
Once the Heads of Agreement is signed by the landlord and the tenant, then usually the landlord will instruct its solicitor to prepare the formal lease documents. Once the documents have been prepared the tenant will usually arrange for its solicitor to review the lease documents.
A solicitor can assist each of the parties with further legal due diligence and ensuring that the lease is prepared on terms which are in the interest of that party.
Even if a Heads of Agreement has been signed by both the landlord and the tenant, we recommend that the tenant does not enter into possession of the premises until the tenant has executed the formal lease and provided all of the required items such as the bank guarantee and evidence of insurance.
A tenant should also be wary about spending money regarding the premises until after the tenant has executed the lease documents and been given possession of the premises.
Are you a commercial landlord or tenant renegotiating the terms of a lease? We can help. For further assistance on commercial leases or other property matters, call our Commercial Leasing Lawyers on (02) 6279 4444.
