It is common practice for a letting agent to prepare a Heads of Agreement (“HOA”) to be entered into by a landlord and a prospective tenant before a lease of retail or commercial premises is signed. The document sets out the basic terms of the lease including the length of time, the rent and whether there is an option to renew. But is it binding on the parties?
The HOA might specifically state that it is binding on the parties. If this is the case then even if they do not enter into a formal lease, the HOA will constitute an enforceable agreement for lease. Sometimes the HOA might state that it is not binding on the parties and, therefore, is merely a basis for further negotiations before a formal lease is finalised.
However, when the HOA does not specify whether it is binding or not, it depends on the intentions of the parties. This is determined by the conduct of the parties before and after the HOA was entered into and how definitive the terms of the HOA are.
It is probably more beneficial for both parties if the HOA states that it is not binding so that each still has the ability to negotiate additional terms that are considered important at a later time to be incorporated into the formal lease. Also, if it is not binding then either party can pull out of the transaction if it suits them better to do so.
Of course, there is no legal obligation on either party to enter into a HOA. It would, of course, be advisable to obtain legal advice first before signing any HOA.
September 2024