The Perfect Heads of Terms - Office€¦ · A national UK law firm Established in the UK top 40 More than 100 partners and 1200 staff 10 offices - Manchester, Birmingham, Milton Keynes,

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Confidentiality note

The contents of this document should be treated as strictly confidential

The Perfect Heads of TermsNick Dalgleish

Solicitor

21 March 2014

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A national UK law firm

Established in the UK top 40

More than 100 partners and 1200 staff

10 offices

- Manchester, Birmingham, Milton Keynes,

Nottingham, Northampton, Thames Valley,

London, Basingstoke, Southampton, and

Edinburgh

http://twitter.com/shoosmiths


http://www.linkedin.com/company/shoosmiths


http://www.youtube.com/user/shoosmithsvideo


http://www.shoosmiths.co.uk/news/1288.htm


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How we structure our services

Corporate

Mergers & acquisitions

Raising finance

Restructuring & insolvency

Tax

Private equity

Real estate

Real estate

Development

Property finance

Construction

Planning

Property dispute resolution

Commercial

Commercial supply contracts

Outsourcing

Regulatory

Employment & pensions

Technology & media

EU Competition & procurement

Data protection

Marine law

Dispute resolution

Recoveries services group

Asset finance

Banking litigation

Consumer Credit

Debt recovery

Financial Services Regulation

Mortgage rehabilitation

Unsecured lending recovery

Private client

Conveyancing

Medical negligence

Motoring

Personal injury

Wills, family & wealth









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Real Estate Nationally

Shoosmiths' Real Estate Group is one of the largest in the UK

Spread over 7 offices from the South Coast to the North West - comprising 35 partners and

230 people in total

Clients include - commercial and residential developers, investors, retail and leisure

operators, social housing bodies, major corporate occupiers, banks and other funders and a

range of public sector bodies

Advising on real estate, construction, planning, property litigation, and environmental









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Real Estate Thames Valley

Team of 12 solicitors with support team

Real Estate and Real Estate Litigation

Wide range of clients – Landlord and Tenant

(Office, Industrial, Retail, Telecoms)

(McKay Securities PLC, Hewlett Packard)









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Sample deal highlights

Acting for Minerva Education Finance Limited / August

Equity LLP on the acquisition of 2 London based school groups

with sites in Chelsea, Pimlico, Belgravia, Knightsbridge, South

Kensington and Marble Arch. Rent roll in excess of £1.7 million

per annum, long leasehold value of £1.5 million.

Advising McKay Securities on the £6m freehold purchase of 1

Crown Square, Woking mixed-use office and retail property.

Advising Autogrill Catering UK Limited on taking a multi-site

lease at the Eurotunnel terminal in Folkestone.

Advising Lloyds Bank Plc on refinancing a timber products

supplier worth £20 million.

“Shoosmiths has

secured a high-profile

client win with an

appointment to serve

as Krispy Kreme's sole

UK legal services

provider.

Shoosmiths will now

advise on all UK legal

issues including real

estate, employment,

pensions, contracts,

commercial and

compliance.”

Legal Week July 2012

Real Estate

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The Perfect Heads

of Terms









8

The Perfect Heads of Terms

Delay

Frustration

Rising legal costs

Business implications (need new premises to trade from a specified date – cost

implications)

Learning from experience - HOTs - consequence of lack of information









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To outline main commercial aspects of a proposed transaction;

A framework document that can be tailored

Pre-agreement of parties intention (often (and should be) expressed as non-binding);

Short form document to guide lawyers

Producing HOTs can identify misunderstandings and highlight major issues at the

earliest stages before legal costs incurred

Increases trust between parties by installing an obligation not to depart from terms

(however if not market standard lawyers may seek client instructions to re-negotiate)

Purpose and Benefits of HOTs









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What do parties want out of the deal?

Landlord Tenant Lawyer Surveyor

Securing rent A Property Happy client and

Fees

Happy client and

Fees

Protecting capital

interest

Fixed / known

costs

Tenant to perform

all Tenant

covenants

To operate their

business without

undue Landlord

influence

Tenant to stay

whole Term

Exit option (break,

assignment)









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Shoosmiths’

Model HOTs









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Do they exist?

There is no absolute “model” HOTs but you can get close

Model HOTs depend on deal complexity and specific requirements

I am focussing on standard negotiated lease HOTs

Some terms obvious to a surveyor are not obvious to a lawyer









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Key Terms

What you need

to consider









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Party identities

company number

Difficult to check when:

party has numbers in its name;

a very common name eg. “John Smith Trading Ltd”; and

a Trading name is used (most common in retail space) – may need to include as

actual tenant name not recognisable.

Guarantor – don’t forget this - often its an international group company in a large

company structure – is an opinion letter needed?

Identity is crucial for Landlord client – as need to ascertain covenant strength of tenant

(may need other security if poor covenant strength e.g. rent deposit, bank guarantee)









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(post code, sales pack and brochure if available)

not essential but useful to have so Tenant solicitor knows what the client has been told –

What is the Building like, service charge level, car parking set up, landscaping.

Property details









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Rent / Rent review

Fixed rent (normally on leases under 5 years)

Stepped rent

Turnover rent

Index linked (which index - RPI, CPI?)

Considering the hypothetical term (unexpired residue of lease or 10 year lease with a

break in year 5)

Are there any unusual assumptions or disregards









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Service charge

expressly state if no service charge cap as tenant’s solicitor often asks for one

Inherent defects – exclude contribution where Landlord is repairing as a result of such

defects









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Insurance – insured/uninsured risks

Landlord insures and recovers premium from Tenant

Tenant agent should always negotiate this in to mirror standard Insured Risk provisions









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Use/change of use permitted

Existing Use is an indicator of planning use (but not concrete evidence)

Careful as change of use can need planning permission (change from restaurant to

pub)

Conditionality?

Make any deal subject to/conditional on planning being obtained (if acting for the

Tenant)









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Assignment – of whole

Underletting – mostly just of the whole, sometimes depending on the size and location

underletting of part may be permitted

Agree and state conditions of assignment (AGA / rent deposit / guarantor, Assignee

covenant strength, 3 year profit test) – more on AGAs later

Underletting conditions – always agree to contract out 1954 Act (if lease is contracted out

don’t want an underlease that is capable of automatic renewal.

Consider underletting rent – open market rent or higher of open market rent and passing

rent (latter more onerous)

Agree same terms as headlease and covenant directly from undertenant to the landlord.

Alienation









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FRI – whether through Tenant repair or Landlord repairing and recharging through the service charge

FRI subject to schedule of condition

Environmental Liability – don’t want to be obliged to pay to put right past contamination (if Tenant)

Inherent Defects – some defect in the design or constructing of building or materials used. If acting for

Tenant don’t want obligation. Exclude.

No statutory definition of “Inherent Defect” so will need to define in the Lease.

Warranties – warranty that Landlord will repair for inherent defects.

Repair / Schedule of condition









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Structural not permitted

Non-structural with consent

Demountable partitioning without consent

Works outside the demise – extends the Property, so Tenant repsonsible to

maintain/repair this area also (common for aircon on wall outside the demise)

Reinstatement obligations “if required by the Landlord”

Alterations









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Any works prior to the lease commencement

Major / minor works

Scope, Longstop date, PC Procedure, subject to planning

Landlord’s Works (will require an agreement for lease)









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Topical HOTs









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Lease Code Compliant HOTs

Only guidance, not set in stone

Aim is to promote fairness in commercial leases

Don’t make a rod for your own back – stating you will agree Lease Code compliant terms

when you don’t intend to can lead to unnecessary arguments

what if your client is restricted by a headlease or a funding arrangement and can’t agree

some Code Complaint provisions

if the Landlord wants to be code complaint but wants to depart from certain code

compliant aspects it should state this clearly in HOTs and its agent will need to justify the

rationale









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Basic “Insured Risks” vs “Uninsured Risks” position

What are Uninsured Risks (either risks the landlord has decided not to insure against or

risks not capable/available for insurance in UK market)

Why does a tenant solicitor want it included

What is the risk

(financial – potentially much higher than the rent you are paying – particularly an

issue in a short term lease as no real value to the tenant. If you had a 99 year lease

the cost of repairing from an uninsured risk in year 10 may not be too bad as you

have 89 years left)

What is the difference between a lease of whole and lease of part (on lease of whole if

premises damaged/destroyed you are left with the bill to reinstate directly. If lease of part

you will be re-charged a proportion of reinstatement cost through the service charge

Insured / Uninsured risks









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Vital to Tenant

Traditional position vs modern position

Meaning of vacant possession

Break conditions









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Not necessarily topical but be categorical

Inside or Outside?

what are the benefits for either party being inside the act?

consequence – you cannot necessarily get the Tenant out of the Property at the end of

the term

LTA 1954

Landlord Tenant

Higher rent - maybe Security – right to renew on

similar terms at lease expiry









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when can a landlord reasonably require an AGA?

Extensive case law

Sufficient financial standing – based on incoming company merits, not outgoing

AGA









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There is not a model set of HOTs - but you can get close

Address any ambiguity – don’t leave gaps which may require further negotiation

The happy medium – strike the right balance between HOTs that are too short and HOTs

that are too long

Conclusion









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Any Questions?

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The Perfect Heads of TermsNick Dalgleish

Solicitor

21 March 2014

Documents

The Perfect Heads of Terms - Office€¦ · A national UK law firm Established in the UK top 40 More than 100 partners and 1200 staff 10 offices - Manchester, Birmingham, Milton Keynes,