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When considering renting out space for your company or business, it is essential to consider your potential lease terms. A useful way to do this is through drafting a Heads of Agreement with your future landlord during lease negotiations. This article will detail what a Heads of Agreement is and outline the key terms you should include when entering such an agreement. 

What Is a Heads of Agreement?

A Heads of Agreement (HOA) is a ‘pre-contract’ document that outlines the obligations and essential terms that both you and the landlord wish to include in your final, legally binding agreement. 

These documents are usually not legally binding. However, if certain elements are present, a court may find that your HOA is legally enforceable. You must be aware of the legal status you and the landlord would like the HOA to have, before signing the document. If it is to be binding, take caution and go through all of the HOA terms to ensure that you agree with and can uphold your obligations. 

Key Terms in a Lease Heads of Agreement 

The Parties of Your Lease Heads of Agreement

As your HOA records the obligations that the parties wish to take on, you must articulate who these parties are at the preliminary stage of lease negotiations. 

Usually, for a lease HOA, this will be the landlord and the tenant. However, a HOA may also involve other parties. For example, if another individual or commercial entity owns the building you wish to lease, or you intend for another person to be liable for the costs involved in leasing the building, they should also be included in the HOA. 

The Premises

A HOA should contain a clearly defined description of the premises you wish to lease. This description should include:

  • the street address of the building;
  • the actual space of the premises; 
  • any other related areas, such as a storage unit or car park; and 
  • what the premises are to be used for.

Commencement Date of Your Lease Heads of Agreement

The commencement date of your HOA can be:

  • the specified date in the agreement; or
  • a trigger date. For example, once the landlord has completed renovations to the premises. 

Term of the Lease

In the HOA, you should include the lease’s length and specify the date that the lease either expires or is available for review. In New Zealand, there is no minimum term for commercial leases. 

Rent

This term should clearly state the rent price and the intervals at which the tenant should pay the rent.

Rent Review 

A rent review clause provides the landlord and the tenant of a property with the ability to alter the premises’ rent to reflect the current market value of that property. If you include such a term in your HOA, you must detail what method of review you will adopt, and the rent review dates. 

Outgoings

Outgoings are the costs of running a building. Some may fall onto the landlord, such as the council rates, and others may be allocated to you, the tenant. When drafting your HOA, it is best practice to include a breakdown of what these outgoings are, approximating the cost and when this transaction is to occur. Typical outgoings for a commercial lease are the provision of toilet facilities or rubbish and recycling charges. 

Guarantee

Before entering into a lease, the landlord may require you to provide some guarantee. Your lease HOA should outline what form this guarantee is to come in. It may be a:

  • security deposit; 
  • a personal guarantee that you will be able to pay rent and perform the terms of the lease; or
  • some other proposed transaction.

Insurance

If you are required to have particular insurance in place at the leased premises, it is useful to list the insurance policies you are willing to take on in the HOA. 

Ongoing Maintenance and Reinstatement

Your landlord may require you to carry out ongoing maintenance or refurbishments throughout your lease. It is worthwhile to outline what these obligations are in the early stages of negotiations. 

The landlord may also want to include a make good term in your lease HOA. A make good clause requires the tenant at the end of their lease to return the premises to the condition that it was in when it first commenced. If the HOA does include a make good clause, make sure it clearly outlines the state that the tenant should return the premises in. 

Assignment of Your Lease Heads of Agreement

Assigning a lease is when you transfer your obligations and rights under that lease to someone else. If this is something that you may be interested in during your tenancy, it is useful to bring this up with the landlord during lease negotiations. 

No Access Period

Following the Christchurch earthquake, it is common for commercial leases in New Zealand to include a no access period clause. This provision details how long it should be before you can terminate your commercial lease if you cannot gain access to the premises due to a natural disaster or interference. When drafting your lease HOA, discuss with the landlord how long this no access period should be. 

Key Takeaways

Entering into a commercial lease is a big commitment. That is why it is essential to ensure that you are informed and familiar with your lease terms. A lease Heads of Agreement is a useful way to record the agreed terms and obligations you and the landlord wish to include in the final lease agreement, and ensure you are both on the same page.

If you are thinking of entering into a commercial lease, or require any other legal advice, LegalVision’s leasing lawyers can help. Contact us on 0800 005 570 or complete the form on this page. 

Frequently Asked Questions

What is a Heads of Agreement?

A Heads of Agreement is a ‘pre-contract’ document that contains the terms and obligations negotiating parties wish to include in a final, binding contract.

What should I include in a Heads of Agreement?

A Heads of Agreement should contain any terms or obligations you wish to include in a final, binding contract. For a lease Heads of Agreement, these terms include the premises to be leased, the commencement date and length of the least, the price of rent, the outgoings and other matters.

Are Heads of Agreement binding?

A Heads of Agreement is typically not binding. However, if it meets the requirements of an enforceable contract, it may be held by a court to be binding.

What is the difference between Heads of Agreement and Heads of Term?

A Heads of Agreement and a Heads of Term are two different phrases for the same document.

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