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Preparing heads of terms and investigating the tenant’s financial standing

Heads of Terms and Vetting Tenants

Heads of terms for commercial letting

When a suitable tenant has been found for the property, the next step is to agree heads of terms for the grant of the lease (or licence as the case may be). Heads of terms are designed to ensure that the landlord and tenant agree all significant points of principle before the landlord prepares and issues the draft lease (or asks his solicitors to do so).

The Heads of Terms should include administrative information, such as the parties’ contact details, and should set out what has been agreed in relation to key points such as the lease term, amount of rent, break rights, assignment and underletting and repair.

Unless the extent of the property is clear without reference to a plan, it is good practice to attach a plan to the heads of terms. A plan is likely to be required for the lease in any event, and the tenant’s solicitor or legal adviser will want to see a plan as soon as they are instructed.

If the grant of the lease is subject to any conditions, e.g. consent of a superior landlord, consent of the landlord’s lender, satisfactory references for the tenant, this should be made clear in the heads of terms. 

Vetting tenants – financial checks and references

When the lease is in place, the landlord will be relying on it as a source of income. The landlord therefore needs to be sure that the tenant is capable of paying the rent. The landlord (or the landlord’s agent) should ask to see audited accounts from the last 2 or 3 years. If these are not available, or if the landlord requires additional comfort, references can be requested from the tenant’s bank and/or a previous landlord. A character reference could also be sought.

If the landlord has concerns about the tenant’s financial position, it could require the tenant to provide security in the form of a rent deposit or one or more guarantors. Any guarantor should be vetted in the same way as the tenant.

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