Property law: Heads of terms (HOT) - don't lose your head

Clear and well thought-out heads of terms (HOTs) are crucial to the smooth running of any pub lease negotiations, so what should you be looking out for in particular?

Leasing a pub is likely to be one of the biggest financial commitments taken on by publicans, who not only commit to paying rent for a period of time, but also assume liabilities in relation to the repair of the premises.

Once a prospective pub has been identified, it can be tempting to speed matters along and take some short cuts with a view to setting up in business and commencing trade, but it would be wise for tenants to ensure that satisfactory terms are agreed at the outset to ensure a sustainable relationship with the landlord.

HOTs are an invaluable tool in focusing minds and recording the principle terms that have been agreed by the parties. A well-prepared set

of HOTs will make the process of drafting and agreeing the pub lease smoother and will help the parties avoid having to re-visit the terms of the deal once the HOTs fall into the hands of the lawyers.

HOTs do not detail every aspect of a transaction, but should record the principle terms so the parties are clear - for example, the exact extent of the premises to be let, the authorised user, the rent and frequency of rent reviews. The parties should also be clear as to their obligations regarding repairs and maintenance. HOTs should include the following:

• Premises - The full description of the premises to be let, preferably with a plan attached. If there are rights to use parking spaces, the exact spaces and locations should be clarified.

• Term - The length of term and term commencement date should be specified. The parties should consider whether the lease is to be excluded from the security of tenure provisions of the Landlord and Tenant Act 1954, and whether there are to be any break clauses or options to renew.

• Rent - The initial rent, frequency of rent reviews and method of review (for example, stepped rent, open market rent or index linked). The HOTs should also clarify the frequency of payment (e.g. monthly or quarterly payments).

• Repair - Is the lease to be a full repairing lease (that is, requiring the tenant to put and keep the premises in good repair and condition) or internal repair only? Is there to be a service charge regime obliging the landlord to carry out works, the cost of which can be re-claimed from the tenant?

• State of the Premises - Tenants should be fully aware of the state and condition of the premises, especially where they take a full repairing lease. They may wish to limit the extent of their liability by reference to a Schedule of Condition.

• Use - The permitted use and the ability (if any) to change the use should be made clear.

• Alienation - The ability for the tenant to assign the lease or to sub-let. If the tenant wishes to sub-let part of the premises, the HOTs should state this in order that the relevant provisions can be included in the lease.

• Alterations - The extent of the tenant's ability to make alterations to the premises should be made clear. If the tenant wishes to make immediate alterations, the HOTs should provide that the landlord will complete a Licence for Alterations at the same time as completing the lease. The tenant could then avoid having to pay the landlord's fee for preparing a Licence for Alterations at a later date. Consent to signage could also be dealt with in the licence.

• Conditions - If the grant of the lease is subject to the satisfaction of any conditions, for example, obtaining of premises licence, completion of landlord's works), the parties' should enter into an Agreement for Lease and ensure that the obligations and precise timescales for satisfaction are clearly detailed in the Agreement for Lease.

Spending time at the outset in preparing a full, clear, accurate set of HOTs will help a transaction run smoothly. It avoids the need for unnecessary costs in debating/re-negotiating unclear terms at a later date.

When negotiating terms, tenants should also be aware of the codes of practice that some of the larger pub operators have adopted or are in the process of adopting. They provide detailed guidance on what the parties can expect when they take on a pub and include information regarding such areas as beer tie, rents and repair and maintenance of premises.

Referring to the codes of practice could assist tenants in agreeing more favourable terms in respect of their own leases.