Heads of terms are the first formal step in any commercial lease negotiation. Before a solicitor drafts a single clause and before either party spends real money on legal fees, the heads of terms capture what landlord and tenant have actually agreed in principle.
They are not the lease itself. But they are the document that sets its direction — and everything that follows is shaped by what is, and what is not, agreed at this stage. Getting them right protects your position. Signing them without thought can lock you into terms you will struggle to undo.
This guide explains what a heads of terms agreement covers, which clauses you should push to secure early, and how the choices made here determine the structure of your final commercial lease.
What are heads of terms in a commercial lease?
A heads of terms agreement — sometimes called a Memorandum of Understanding (MOU) or Term Sheet — is a written summary of the key commercial points both parties have agreed before the formal lease is prepared. It typically runs to two or three pages and covers the headline deal: the property, the rent, the length of the lease, the repair position, and a handful of other critical points.
Think of heads of terms as the skeleton of your commercial lease. They give the solicitors their instructions. A good set means legal drafting moves quickly. A vague or incomplete set means weeks of extra correspondence, disagreements at the drafting stage, and legal costs that could easily have been avoided.
Heads of terms are usually prepared by the landlord or their letting agent, then shared with the tenant for review and negotiation. On more complex deals, or where the financial stakes are high, it is increasingly common for solicitors to be involved at this stage rather than being brought in only once terms are ‘agreed’.
Are heads of terms legally binding?
In most cases, no — and this is deliberate. A heads of terms agreement should always be marked ‘subject to contract’ so that neither party is legally committed until the full lease is executed. This allows the deal to be refined as due diligence progresses and avoids either party being held to points that were agreed before the full picture was known.
There is an important exception. While the core commercial deal is non-binding, specific clauses within the heads of terms can be — and often are — legally enforceable. These typically include confidentiality obligations and any lock-out or exclusivity clause that prevents the landlord from marketing the property to other potential tenants during the negotiation period. If these provisions are present, they must be clearly distinguished from the rest of the document.
Courts have on occasion treated heads of terms as binding where the language used suggests that was the parties’ intention — even without explicit confirmation. This is a risk that reinforces why legal review before signing matters more than many tenants appreciate.
What should a heads of terms agreement include?
A well-drafted heads of terms agreement for a commercial lease needs to cover enough ground that the solicitors can work from it without constantly going back for instructions. The following are the core elements that should always be present.
Parties, property and term
The full legal names of the landlord, tenant and any guarantor must be correct from the outset. The property description should include the full address and, where only part of a building or site is being let, a plan showing the precise extent of the demise. The proposed lease length and start date should also be confirmed here.
Rent, rent review and incentives
The annual rent, payment frequency and whether VAT applies should all be stated clearly. The rent review mechanism — open market, index-linked to RPI or CPI, or agreed fixed increases — needs to be agreed in principle at this stage, not left for the lease drafting. Any rent-free period offered to help with fit-out costs, and any rent deposit required by the landlord (including how it will be held and when it is returned), should also be recorded.
Security of tenure under the Landlord and Tenant Act 1954
One of the most significant decisions in any commercial lease is whether the tenancy is to be ‘inside’ or ‘outside’ the Landlord and Tenant Act 1954. A lease protected by the Act gives the tenant a statutory right to renew at the end of the term. A contracted-out lease does not. This decision must be recorded in the heads of terms because it affects the entire commercial value of the lease to the tenant and cannot simply be inserted or removed at the drafting stage without both parties’ agreement.
Repair obligations and schedule of condition
Most commercial leases impose full repairing and insuring (FRI) liability on the tenant. This means the tenant is responsible for keeping the property in good repair throughout the term and must return it in that condition at expiry, regardless of what state it was in when they took it on. Where the property is not in perfect condition at the start, agreeing to limit the tenant’s liability by attaching a schedule of condition is critical — and that agreement needs to appear in the heads of terms before solicitors begin drafting.
Permitted use, alienation and alterations
The permitted use clause defines what the tenant can do at the property. A narrow use clause limits flexibility; a wider one gives the tenant room to adapt their business and improves the lease’s value if they ever wish to assign it. The heads of terms should also confirm whether assignment and subletting will be permitted and on what conditions, and whether the tenant will be able to carry out alterations or fit-out works with or without the landlord’s consent.
Clauses you should push to secure at the heads of terms stage
This is where the heads of terms process has the most practical value for tenants. Once terms are signed and the lease is in drafting, your bargaining power reduces significantly. The landlord’s solicitors will anchor the lease to what was agreed, and renegotiating core points at that stage is difficult, expensive and damaging to the relationship. The time to fight for favourable terms is now.
Understanding which commercial lease terms carry the most risk is the essential first step. A detailed breakdown of the ten commercial lease terms that matter most will help you identify which provisions warrant the firmest negotiating position before the heads of terms are finalised.
The following six clauses deserve particular attention at the heads of terms stage:
- Break clauses. A break clause that is not clearly worded in the heads of terms often fails in the lease. The right to break — who holds it, when it can be exercised, and exactly what conditions must be satisfied — must be specific. A tenant-only break at year three, exercisable on six months’ notice with vacant possession, is a very different thing from a vague ‘mutual break after three years’. Ambiguity here costs tenants their exit route.
- Rent review mechanism. Whether the review is upwards-only, open-market, RPI/CPI-linked or fixed is a fundamental commercial point. Agreeing an upwards-only open-market review without challenge can expose a tenant to significant rent increases over a long lease. Getting the method confirmed in the heads of terms gives your solicitor firm instructions to work from.
- Schedule of condition. If the property is anything less than perfect, pushing for a schedule of condition to be attached and referenced in the heads of terms is essential. Without it, the tenant inherits the obligation to put the property into full repair — even for defects that existed before the lease began.
- Service charge cap. Where the property forms part of a larger building or estate, the service charge can fluctuate significantly. Agreeing a cap on the tenant’s service charge exposure — or at minimum a mechanism for challenging unreasonable increases — is far easier to achieve in the heads of terms than once the lease is drafted.
- Alienation rights. If there is any prospect of the tenant wanting to assign the lease or sublet part of the space during the term, these rights must be agreed in principle now. A landlord may be willing to include a qualified right to sublet at the heads of terms stage but become resistant once solicitors are involved. How subletting rights work in practice is worth understanding before these points are discussed.
- Landlord and Tenant Act 1954 protection. Whether the lease is protected or contracted-out must be confirmed clearly. For most business tenants, statutory renewal rights under the 1954 Act provide meaningful security. Where a landlord proposes to contract the tenancy out, this should be a genuine point of negotiation — not simply accepted as standard.
About to sign a heads of terms agreement?
Signing without a legal review can lock you into onerous terms that are difficult to undo once the lease is in drafting. Speak to a commercial property solicitor to secure your position while your bargaining leverage is at its highest.
How heads of terms shape the final commercial lease
The connection between a heads of terms agreement and the completed commercial lease is direct and consequential. What is agreed — and what is left out — at the heads stage flows into every clause the solicitors draft. Understanding this relationship is the key to using the heads of terms process strategically rather than treating it as a formality.
They define the solicitors’ instructions
Once both parties sign or confirm the heads of terms, the solicitors are instructed to produce the lease based on what is recorded there. Any point that is clearly agreed in the heads of terms is, in practice, settled. Reopening it costs time, money and goodwill. Points that are ambiguous or absent become the subject of negotiation between solicitors — at a higher cost per hour than the agent who handled the heads of terms.
They set the commercial weight of each party’s position
A landlord who has agreed in the heads of terms to a tenant break at year three cannot credibly withdraw that right at the lease drafting stage without serious consequences for the transaction. Equally, a tenant who has accepted full FRI liability in the heads of terms cannot easily negotiate a schedule of condition into the lease after the fact. The heads of terms lock the commercial position in place — which is why the negotiation that happens before they are signed carries disproportionate weight.
They can be the source of costly disputes if drafted badly
Vague heads of terms create problems at every stage that follows. Where the break clause conditions are unclear, solicitors may spend weeks arguing about what was intended. Where the repair position is left undefined, a dispute about the schedule of condition can delay completion and lead to significant additional costs. The RICS 2020 Lease Code recognises this — it sets out mandatory requirements for agents and landlords regulated by RICS when agreeing terms for vacant premises, precisely because poorly documented heads of terms are a well-established source of property disputes.
Why legal advice before signing heads of terms matters more than most people think
The most common misconception about heads of terms is that because they are ‘not legally binding’ they do not require serious legal attention. In practice, the opposite is true. The fact that they are non-binding means this is the only stage at which you can negotiate freely without the formal structure of lease obligations applying. Once the lease is drafted, the negotiation is constrained by what the heads of terms say.
There are specific risks in signing without a legal review. Some clauses that look straightforward — a service charge arrangement, a break clause expressed in general terms, or a reference to ‘full repairing liability’ — carry consequences that are not apparent unless you understand commercial lease law. A solicitor reviewing the heads of terms before they are signed can identify these risks, propose amendments, and ensure the document accurately reflects what you have actually negotiated rather than what the other party has drafted in their own favour.
For both landlords and tenants, specialist support when negotiating the terms of a commercial lease — including at the heads of terms stage — strengthens the final position before legal costs accumulate and bargaining leverage begins to fall away.
There are also practical benefits beyond risk avoidance. A solicitor who understands the full scope of the commercial lease from the outset can flag ancillary documents that will be needed — a rent deposit deed, a licence for alterations, or an agreement for lease where the deal is conditional on works or planning consent. Identifying these early prevents surprises after the formal lease process begins.
What happens after heads of terms are agreed?
Signing off a heads of terms agreement is the beginning of the legal process, not the end of the commercial one. Once the document is confirmed, the landlord’s solicitors will typically produce a draft lease based on the agreed points. At that stage, the tenant’s solicitors review it, raise enquiries, and negotiate any provisions that need to be refined.
Throughout this stage, the heads of terms function as a reference point. If the draft lease contains a clause that does not reflect what was agreed — a narrower permitted use clause, a more onerous repair obligation, or a different break notice period — the tenant’s solicitor will use the heads of terms to push back. This is precisely why precision in the heads of terms document matters: ambiguity creates scope for the draft lease to depart from what you believed you had negotiated.
Once the lease is finalised and executed, its terms supersede the heads of terms entirely. The lease is the legally binding document. Any discrepancies between what the heads of terms said and what the lease contains will be governed by the lease — not by what was discussed earlier. This is another reason to have a solicitor check that the final lease accurately reflects the agreed terms before it is signed.
Having the formal commercial lease reviewed by a specialist before signing — not just at the heads of terms stage — is an important safeguard. A professional lease drafting and review service gives landlords and tenants confidence that the final document reflects the deal that was agreed — clearly, enforcably, and without hidden risks buried in the small print.
Key points to remember about heads of terms
Whether you are a landlord, a tenant or a business advising either, these are the points that matter most when approaching a heads of terms agreement:
- Heads of terms are not legally binding in the commercial sense, but they carry significant practical weight. What is agreed here shapes every subsequent negotiation.
- Always mark the document ‘subject to contract’. Without this, there is a risk — however small — that a court treats the heads of terms as a binding agreement.
- Specific clauses — particularly exclusivity and confidentiality provisions — can be binding even within a non-binding document. These must be clearly identified.
- The clauses that matter most in the final commercial lease — break rights, rent review, repair liability, security of tenure, use and alienation — must be addressed at the heads of terms stage, not left to be resolved in the drafting.
- Vague heads of terms create delays, disputes and unnecessary legal costs. Precision at this stage saves money at every stage that follows.
- Legal advice before signing is not a formality. It is the point at which you have the most leverage and the least financial exposure. Use it.
A carefully negotiated heads of terms agreement does not just make the legal process smoother — it makes the commercial lease that results from it fairer, clearer, and more aligned with what both parties actually agreed. For landlords, it establishes the structure of a long-term income asset. For tenants, it determines the financial and operational commitments they will live with, sometimes for a decade or more. The effort invested at the heads of terms stage is never wasted.
For broader context on commercial property best practice in England and Wales, the Harper James guide to using heads of terms in commercial leases and property transactions offers further insight from experienced commercial property solicitors.
Need expert advice on your commercial lease heads of terms?
The heads of terms set the skeleton for your entire commercial lease. Decisions made now—from repair obligations and break clauses to subletting rights—shape your final legal and financial commitments. Our commercial property solicitors can review your heads of terms before you sign, ensuring your interests are protected before legal costs accumulate.