In commercial property transactions — whether a new lease, a lease renewal, a licence to alter, or a sale and leaseback — it is standard practice for the parties or their agents to agree heads of terms before instructing solicitors to prepare or negotiate the formal legal documentation. Heads of terms (sometimes called heads of agreement, a letter of intent, or a memorandum of understanding) summarise the key commercial deal points: rent, term, break clauses, repairing obligations, rent review, permitted use, and so on. They are almost invariably expressed to be 'subject to contract' — meaning that neither party is legally bound until formal contracts (lease or agreement for lease) are exchanged. This 'subject to contract' status allows either party to withdraw from the deal up to the point of exchange, but it also creates risk: without a binding lock-out agreement, the landlord can continue negotiating with other parties (gazumping) or the tenant can withdraw (gazundering). Understanding what heads of terms should cover, when they become binding, and how to protect your position is critical for both commercial landlords and tenants.
Are Heads of Terms Legally Binding?
Almost all commercial property heads of terms are expressly stated to be 'subject to contract' — which means that in English law, neither party is legally bound to proceed with the transaction, and no enforceable contract has been created. The phrase 'subject to contract' prevents the heads of terms from constituting an enforceable agreement to enter into the lease: Pitt v PHH Asset Management Ltd [1994] 1 WLR 327 (CA). This is the case even if the parties have agreed all commercial terms and both intend to proceed. The principle is important: either party can withdraw at any time before formal contracts are exchanged without legal liability for the deal itself (though wasted costs may be recoverable in limited circumstances). Without a binding lock-out agreement, the landlord can offer the property to another party even after heads of terms have been signed — an outcome that can be commercially devastating for a tenant who has already committed to vacating existing premises.
- 'Subject to contract': the standard qualification inserted in all commercial property heads of terms in England and Wales — creates no binding legal obligation to proceed
- Pitt v PHH Asset Management [1994] 1 WLR 327: Court of Appeal confirmed that 'subject to contract' negotiations create no enforceable contract; parties can withdraw at any time
- Withdrawal risk: either party can walk away up to the point of formal exchange without liability for the deal — though wasted professional costs may be recoverable in limited circumstances
- Lock-out agreements: a separate, binding agreement under which the landlord agrees not to negotiate with any other party for a defined period (typically 6–12 weeks) — provides the tenant with time-limited exclusivity; must be supported by consideration (typically a nominal payment); Walford v Miles [1992] AC 128 (HL)
- Walford v Miles [1992]: HL confirmed that English law does not impose a general duty to negotiate in good faith — no duty to proceed even after heads of terms are agreed; underlines the importance of a binding lock-out agreement
What Should Heads of Terms Cover?
Comprehensive heads of terms reduce the risk of deal fall-through and renegotiation during the legal process. The RICS Code for Leasing Business Premises (2020) recommends that heads of terms are agreed before solicitors are instructed, and that they cover all principal commercial terms. Key commercial terms for a commercial letting heads of terms include: the property description; commencement date and practical completion arrangements; term of lease; annual rent; rent-free period or other incentives; rent review mechanism and frequency; break clause dates and conditions; repairing obligations (FRI vs other); service charge cap or mechanism; permitted use; alienation provisions (assignment/subletting restrictions); alterations (permitted/consented); guarantors; deposit requirements; security deposit or rent deposit deed; SDLT liability; legal fees; and any conditions precedent (planning; building regulation approval; landlord's works).
- Property: full address; floor area; specification; any areas excluded from the demise
- Term: commencement date; contractual term length; any options to extend
- Rent: annual rent (per annum exclusive of VAT and service charge); VAT position; payment dates (typically quarterly in advance)
- Rent-free period: duration; whether it applies to the whole of the rent or only to the base rent; whether it is conditional on the tenant occupying throughout
- Rent review: frequency (typically every 5 years); mechanism (open market upward-only; CPI/RPI-linked; fixed step-up); reference date; headline vs effective rent
- Break clauses: break date(s); whether exercisable by landlord, tenant, or both; pre-conditions (compliance with covenants; vacant possession; minimum notice period)
- Repairing obligations: full repairing and insuring (FRI) — tenant responsible for the whole premises; internal repairing only — landlord maintains structure and exterior; schedule of condition attached
- Permitted use: specific use (e.g., Class E offices; retail; industrial) or broader user covenant; any restrictions
Binding Elements of Heads of Terms
Although heads of terms are almost always expressed to be non-binding as to the deal itself, certain specific provisions within them may be binding. Common examples include: a confidentiality undertaking (binding obligation on both parties not to disclose the terms of the deal to third parties); a lock-out clause (binding obligation on the landlord not to deal with other parties for a defined period); and an obligation to pay the other party's professional costs in specified circumstances (e.g., if the party withdraws unreasonably). These binding elements need to be clearly identified and expressed to be binding — ideally in a separate agreement or in clearly delineated provisions within the heads of terms. It is also important to note that the 'subject to contract' qualification may be waived inadvertently if the parties act as though the deal is done — for example, by beginning works or taking actions clearly inconsistent with the 'subject to contract' position.
- Confidentiality provisions: binding obligation on both parties not to disclose deal terms to third parties — typically expressly stated to be binding in commercial property heads of terms
- Lock-out clause: binding exclusivity for the tenant — landlord agrees not to negotiate with others for a defined period; must be backed by consideration; specify the lock-out period and its conditions clearly
- Cost liability: binding obligation to pay the other party's abortive professional costs in specified circumstances — useful protection against opportunistic withdrawal
- Implied waiver of 'subject to contract': rare but possible — if the parties have acted as though the deal is concluded (e.g., one party has commenced works under the agreed terms), a court may find the 'subject to contract' label has been waived; Sherbrooke v Dipple (1980)
- Conditions precedent: some heads of terms are expressed to be conditional (but binding) on specified events — e.g., receipt of satisfactory planning permission; completion of the landlord's building works; exchange in that case is delayed until the condition is satisfied
RICS Code for Leasing Business Premises
The RICS Code for Leasing Business Premises (England and Wales) — most recently updated in 2020 — is a voluntary code of best practice for commercial leasing in England and Wales. It encourages landlords and tenants to agree detailed heads of terms before instructing solicitors; to use the code's recommended form of heads of terms; and to adopt lease terms that are fair to both parties (for example, by not insisting on absolute upward-only rent reviews where market evidence does not justify it). While the RICS Code is not legally binding, it carries significant weight in the market: institutional landlords, major developers, and the property professions generally adhere to it, and surveyors advising tenants will often refer to it when challenging onerous lease terms during negotiation. Where the parties adopt the RICS Code, heads of terms should confirm this.
- RICS Code for Leasing Business Premises (2020): voluntary best practice code for commercial leasing in England and Wales; encourages detailed heads of terms before instructing solicitors
- Recommended terms: the Code promotes fair and balanced lease terms — e.g., break clauses (recommended that break clauses are not made conditional on full compliance with all tenant covenants); rent review (clear and fair mechanisms); alterations (reasonable consent procedures)
- Not legally binding: the Code is not a statutory instrument; parties are not legally required to comply; but institutional landlords and professional advisers generally follow it
- Heads of terms form: the RICS provides a recommended form of heads of terms covering all key commercial and legal points — a useful starting point for both landlords and tenants
- Scotland: RICS Scotland publishes separate guidance on commercial leasing practice in Scotland; Scottish leases governed by Scots law; heads of terms practice similar but the legal documentation process differs (missives rather than exchange of contracts)
Heads of Terms for Lease Renewals and Rent Reviews
Heads of terms are not only used for new commercial lettings — they are also the standard vehicle for agreeing terms in lease renewals under the Landlord and Tenant Act 1954, and for agreeing the outcome of rent review negotiations. In LTA 1954 renewal negotiations, heads of terms will typically set out the agreed new rent, the new lease term (often 5 or 10 years), any changes to the existing lease terms, and any tenant improvements to be disregarded at rent review. Once heads of terms for a renewal are agreed, solicitors proceed to prepare the new lease — but until the new lease is completed, the existing tenancy continues by statute (and the new lease has not been created). For rent reviews, heads of terms (sometimes called a rent review memorandum) record the agreed reviewed rent and the basis on which it was agreed, and are appended to the lease. A signed rent review memorandum is binding once executed.
- LTA 1954 renewal: heads of terms for a new lease on renewal; typically cover new rent; term; any changes to existing lease; tenant improvements to be disregarded
- Rent review heads of terms: informal agreement of the reviewed rent during negotiations; until a signed rent review memorandum is executed, the agreed rent is 'subject to contract'
- Rent review memorandum: once signed, the memorandum records the new reviewed rent and is appended to the lease; binding from date of execution; back-dated to the review date; interest on the difference may accrue under the lease
- Pre-action for LTA 1954 renewal: both landlord and tenant can apply to the court for a new tenancy once the relevant notice period has expired; heads of terms agreed during negotiation may be taken into account by the court in fixing terms
- Licence to alter: heads of terms for a licence to alter record the agreed terms of the licence (specification of proposed works; reinstatement obligation; landlord's oversight rights; approval process) before solicitors prepare the formal licence
Frequently asked questions
Are heads of terms legally binding in commercial property?+
No — commercial property heads of terms are almost always expressed to be 'subject to contract', which means neither party is legally bound until formal contracts (a lease or agreement for lease) are exchanged. Either party can withdraw at any time before exchange without legal liability for the deal, though wasted costs may be recoverable in limited circumstances (Pitt v PHH Asset Management [1994]).
What is a lock-out agreement in commercial property?+
A lock-out agreement is a separate, binding agreement under which the landlord agrees not to negotiate with any other party for a defined period (typically 6–12 weeks), giving the tenant time-limited exclusivity to exchange contracts. It must be supported by consideration (typically a nominal payment). English law does not impose a general duty to negotiate in good faith (Walford v Miles [1992]), so without a lock-out agreement, the landlord can deal with other parties even after heads of terms are agreed.
What should commercial property heads of terms include?+
Comprehensive heads of terms should cover: property description; term; annual rent; rent-free period; rent review mechanism and frequency; break clause dates and conditions; repairing obligations (FRI or other); service charge; permitted use; alienation (assignment/subletting) provisions; alterations; guarantors; deposit requirements; SDLT responsibility; legal fees; and any conditions precedent (planning; landlord's works). The RICS Code for Leasing Business Premises (2020) provides a recommended form of heads of terms.
Can parts of heads of terms be binding even if the deal is 'subject to contract'?+
Yes — specific provisions within heads of terms can be binding, including confidentiality obligations, lock-out clauses, and obligations to pay the other party's professional costs in specified circumstances. These need to be clearly identified and expressed to be binding — ideally in a separate agreement or clearly delineated provisions within the heads of terms.
How do heads of terms work in a LTA 1954 lease renewal?+
In a Landlord and Tenant Act 1954 lease renewal, heads of terms record the agreed commercial terms for the new lease (new rent; term; any changes to existing covenants). They are non-binding ('subject to contract') until the formal new lease is executed. The existing tenancy continues by statute until the new lease is completed. Once a rent review memorandum is signed for a rent review outcome, it is binding from the date of execution.