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Heads of Terms

Are you about to buy or sell a commercial property? Have you considered the importance of Heads of Terms?

Are you about to buy or sell a commercial property? Have you considered the importance of Heads of Terms?

Heads of Terms are the first step in any commercial property transaction. Whether you are buying commercial property or selling commercial property this key document will assist you in negotiating the most important terms of your sale or purchase, and will record the terms agreed between you and the other party. This will prevent confusion and identify potential “deal breakers” before you incur significant time and costs.

A commercial property agent will usually prepare the first draft Heads of Terms on behalf of the seller. However, both the buyer and the seller should also take advice from a solicitor and a surveyor before agreeing to any Heads of Terms as the terms agreed at this stage will determine the contents of the legal documentation.

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Here are 6 key terms that should be considered for any sale or purchase of commercial property. If you are taking or granting a lease of commercial property instead please see Taking a Business Lease.

Description of the property

The property being sold and purchased should be described by both full address and HM Land Registry title number, if registered. A plan showing the property should also be annexed to the Heads of Terms although a seller may not want to go to the expense of having a plan prepared at this stage if a plan is not already readily available for use.

The Heads of Terms should also set out whether the property is being sold with vacant possession or subject to any leases.

Purchase Price

The purchase price should be set out in both words and figures. The Heads of Terms should also record the amount of the deposit to paid at exchange of contracts, with the balance being payable on completion of the transaction.

Where a property or piece of land being sold also has development potential, the seller may require an overage payment. This is a second sum of money due from the buyer to the seller on the completion of certain conditions or events e.g. obtaining planning permission for the property. Overage provisions are extremely complicated and these should never be agreed in principle without taking legal advice. Once Heads of Terms are agreed the expectation is that both parties will stick to the recorded agreement and if you try to negotiate such terms after the event the other party may not be very forthcoming.

Rights, Reservations and Restrictions on Use

If only part of a property is being sold, rather than a whole property, the seller will likely want to reserve rights to benefit the land being retained over the property being sold. This may include rights of way and rights to connect into and use service media. In addition, the seller may want to limit how the buyer can use the property being sold in order to restrict any impact on the seller’s retained land. Whilst such clauses are beneficial to a seller a buyer will need to make sure that any such reservations and restrictions on use will not impede his intended use and plans for the property.

The seller may also need to grant rights over the land that is being kept in order that the buyer has any rights necessary for the proper use and enjoyment of the property.

Conditions for Completion

Sometimes, completion of the transaction will be conditional upon specific events. For example, a buyer may only be purchasing a property because of its development potential, in which case it may be a condition of completion that planning permission is obtained for the property. Other typical conditions may include financial considerations (e.g. obtaining suitable finance).

Transaction timetable

It is often very useful to set out a timetable for the transaction which will set out target dates for key stages. Sometimes this is limited to target dates for exchange and completion. However, a timetable can also set out target dates for other stages, such as the seller’s solicitor sending the draft contract documentation to the buyer’s solicitor, and the buyer’s solicitor returning his comments on this. Whilst such dates are not legally binding, this can be a good way of keeping the transaction moving forward.

Tax considerations

The Heads of Terms will need to set out whether the purchase price is subject to VAT and also any agreements or apportionments in relation to capital allowances. For more information on these points please see VAT, SDLT and Capital Allowances.

Are Heads of Terms legally binding?

The whole point of Heads of Terms is that they are not legally binding. Otherwise this goes against their very function and would leave the parties with a binding contract that would not properly protect the parties’ interests. Heads of Terms should therefore be marked ‘subject to contract’ and contain a clause confirming that they are not intended to be legally binding, except perhaps for clauses as to confidentiality.

However, it is worth remembering, that once you have agreed to Heads of Terms, the other party may not be very happy if you attempt to renegotiate or change terms further down the line. They are likely to simply say no to you. So, take legal advice early, preferably before you agree to Heads of Terms, and don’t underestimate the sticky position you might find yourself in if you do not!

For more information on Heads of Terms of buying commercial property...

Please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 for a free discussion or email natalie.hopkins@everymanlegal.com

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