Are Heads of Terms Legally Binding?
Almost all commercial property heads of terms expressed 'subject to contract' — non-binding in English law until formal contracts are exchanged (lease or agreement for lease). Pitt v PHH Asset Management [1994] 1 WLR 327 (CA): 'subject to contract' prevents binding agreement even if all commercial terms agreed. Withdrawal risk: either party can walk away before exchange without legal liability for the deal; wasted costs may be recoverable in limited circumstances. Lock-out agreement: separate binding agreement — landlord agrees not to deal with others for defined period (typically 6–12 weeks); must be supported by consideration. Walford v Miles [1992] AC 128 (HL): English law does not impose general duty of good faith in commercial negotiations; underlines importance of binding lock-out agreement.
What Heads of Terms Should Cover
RICS Code for Leasing Business Premises (2020) recommends heads of terms cover all principal commercial terms before solicitors are instructed. Key terms: property (address; floor area; specification; excluded areas); term (length; commencement; options to extend); rent (per annum exclusive; VAT; payment dates); rent-free period (duration; conditions); rent review (frequency; mechanism — OMV upward-only; CPI; fixed step-up; reference date); break clauses (dates; exercisable by landlord/tenant/both; pre-conditions; notice period); repairing obligations (FRI vs internal repairing; schedule of condition); service charge (mechanism; cap); permitted use; alienation (qualified/absolute); alterations; guarantors; deposit; SDLT responsibility; legal fees; conditions precedent (planning; landlord's works).
Binding Elements Within Non-Binding Heads of Terms
Specific provisions within non-binding heads of terms can be expressly stated to be binding: confidentiality obligation (both parties not to disclose deal terms); lock-out clause (binding exclusivity for tenant — specify period and conditions); abortive costs liability (obligation to pay other party's professional costs in specified circumstances). Must be clearly identified as binding — ideally in separate agreement or clearly delineated provisions. Implied waiver of 'subject to contract': rare but possible where parties act as though deal is concluded — Sherbrooke v Dipple (1980). Conditions precedent: heads of terms can be conditional (but binding) on specified events — planning permission; completion of landlord's works.
RICS Code for Leasing Business Premises
RICS Code for Leasing Business Premises (England and Wales, 2020): voluntary best practice code; encourages heads of terms before solicitors instructed; provides recommended form of heads of terms; promotes fair and balanced lease terms — e.g., break clauses not conditional on full covenant compliance; clear rent review mechanisms; reasonable alterations consent procedures. Not legally binding: but institutional landlords and professional advisers generally follow it. Scotland: RICS Scotland publishes separate guidance; Scottish leases governed by Scots law; heads of terms practice similar but legal documentation process differs (missives not exchange of contracts).
Heads of Terms for Lease Renewals and Rent Reviews
LTA 1954 renewal: heads of terms record agreed new rent; term; changes to existing lease; tenant improvements to be disregarded at rent review. Non-binding until new lease executed — existing tenancy continues by statute throughout. Rent review heads of terms: informal agreement of reviewed rent during negotiations is 'subject to contract'; signed rent review memorandum: binding from date of execution; backdated to review date; interest on the difference may accrue; appended to lease. Pre-action: heads of terms agreed in LTA 1954 renewal negotiations may be taken into account by court in fixing terms of new lease. Licence to alter: heads of terms record specification of proposed works; reinstatement obligation; landlord's oversight rights; approval process.