Heads of agreement for a lease explained

A heads of agreement for a lease is a short document that sets out the main commercial terms of a lease before the lease itself is prepared. It usually covers the premises, rent, term, options, incentives and who pays for the fitout. Most heads of agreement are not binding, but some clauses can be, and the wording decides which.

What a heads of agreement usually covers

A heads of agreement is often only a few pages. It records the deal so the full lease can be prepared from it. Common terms are:

• the parties and any guarantors
• the premises and the leased area
• the start date, the term and any options
• the starting rent and how it is reviewed
• outgoings, and whether the lease is gross or net
• the bond or bank guarantee
• the permitted use
• incentives, such as a rent-free period or fitout contribution
• works the landlord or tenant will do before the lease starts
• who pays the legal costs

Landlords and agents also call it a letter of offer, a terms sheet or a lease proposal. The name doesn’t change how it works.

Is a heads of agreement binding?

It depends on what it says. Most say they are “not binding” or “subject to lease”, which usually means neither party is bound until the formal lease is signed.

Some clauses are often made binding even when the rest isn’t, such as:

• confidentiality
• exclusive dealing for a period
• a deposit and when it is refunded
• each party paying its own costs

If the heads of agreement doesn’t say it is non-binding, and it contains all the essential terms, a court may treat it as a binding agreement. That can lock you into terms you meant to negotiate later.

Signed a heads of agreement as landlord? We prepare the lease from it and flag anything the heads of agreement left out. Have your lease drafted.

Heads of agreement, agreement for lease and lease

An agreement for lease is used when the lease can’t start straight away, for example because the building is still being built or the landlord is doing works first.

Retail leases

If the premises are retail, your state’s retail leases Act may apply from an early stage. In most states, the Act treats an agreement for lease as a lease. The landlord’s disclosure obligations are usually tied to the date the lease or agreement for lease is entered into, so a binding heads of agreement could start the clock early.

Some states also have rules about deposits paid before a retail lease is signed. If you are not sure whether your premises are retail, see commercial lease vs retail lease.

What to check before you sign

• Is it clearly non-binding? If that is the intention, it should say so.
• Are the key terms there? Rent, rent reviews, term, options, outgoings, incentives and make good are the terms most likely to matter later.
• What happens to a deposit? Check when it is refundable and when it can be kept.
• Who pays the costs? In a retail lease, the landlord’s costs of preparing the lease usually can’t be passed on to the tenant.
• Is it conditional? For example, on finance, council approval or works being finished.

Why it matters for the lease

A heads of agreement is often signed quickly, by agents, before either side has advice. Terms left out of it can be harder to raise later, because the other side treats the deal as done.

The more of the deal it records, the quicker the lease can be prepared, and the fewer surprises there are when it arrives. For the clauses the full lease needs, see what to include in a commercial lease.