What is a Heads of Agreement?

Landlords will often set out the key commercial terms of retail and commercial leases for a prospective tenant in a signed document, known as a Heads of Agreement or HOA, Lease Offer, or Letter of Offer.

A Heads of Agreement is often prepared by real estate agents, providing a helpful framework which underpins the intention of the parties to enter into a lease arrangement.

This document will vary in terms of formality and substance, according to the parties’ particular requests and concerns. For example, if the tenant requires a fit out in the premises or the landlord requires special conditions then additional documents may be necessary.

A Heads of Agreement will usually contain the following details:

    1. Premises:

      • address of the premises;
      • legal description of the premises, for example the Block Section and Division (in the ACT) or the Lot and Deposited Plan (in NSW); and
      • lettable area of the premises
    2.  Parties:

      • details of each party including ACNs (if applicable), contact details and their solicitor details (if applicable).
    3. Summary of lease terms including:

      • commencement and termination dates;
      • option for further terms and the timeframe in which the option must be exercised;
      • rent amount per annum
      • method of rent review, for example CPI, market rent, or fixed percentage increases;
      • outgoings payable by the tenant, for example increases over a base year, included in gross rent or all payable;
      • personal guarantee, bank guarantee, or bond;
      • make good requirements; and
      • special conditions.
    4. Terms about whether the Heads of Agreement is legally binding or not (see further discussion below).

What should a landlord consider?

When preparing or asking the real estate agent to prepare the Heads of Agreement, the landlord should consider the following:

    1. Due diligence regarding tenant

      It is important for landlord to conduct or arrange for their real estate agent to conduct due diligence regarding the proposed tenant entity before entering into a Heads of Agreement. This may include:

      • on the tenant’s financial capacity and their ability to meet their rental obligations and
      • references of the tenant’s business skills and experience.

      This may affect the landlord’s decision regarding what security it requires from the tenant for the lease to proceed.

    2. Void terms

      If the relevant Leases Act applies (in the ACT, the Leases (Commercial and Retail) Act 2001 (ACT) and in NSW, the Retail Leases Act 1994 (NSW)) then terms that are inconsistent with the Leases Act are likely to be void.

      If you are not sure if the relevant Leases Act applies or if a term which is included in the HOA is void, we recommend seeking advice from your solicitor prior to signing the Heads of Agreement.

    3. Circumstances of the premises

      The landlord should consider the relevant circumstances of the premises and managing the risks associated with those circumstances, such as:

      • the current condition of the premises and what condition the landlord requires the tenant to return the premises in, for example the fit out and make good obligations;
      • the permitted use of the premises and whether the tenant’s proposed use of the premises is consistent with the current approvals;
      • the landlord’s property included in the premises and who is required to maintain and repair it, for example air conditioning; and
      • the landlord’s future plans for the property, for example whether the landlord wants to include a relocation or demolition clause.

What should a tenant consider?

From a tenant’s perspective, it is important to consider if the premises is right for the tenant’s needs. This includes due diligence regarding:

  • the current condition of the premises and any fit out which will remain in the premises;
  • the permitted use of the premises;
  • the building services available to the Premises for example air conditioning, electricity, grease trap;
  • the Tenant’s future plans for the property;
  • car parking available and whether it is allocated to the tenant or used in common with others;
  • the tenant’s access to the premises, will early access be available to undertake the tenant’s fit out;
  • the payment of outgoings and rent;
  • the obligations to pay for separately metered services;
  • the obligations to repair and maintain the premises and equipment in the premises.

A tenant should also review the terms of the payment of the deposit for the lease and whether it is refundable to the tenant if the lease does not proceed.

legally binding heads of agreement - two people in suits handshaking

Is a Heads of Agreement legally binding?

The Heads of Agreement or HOA is likely the first document signed by both the tenant and landlord as a basis for the negotiation of key terms before entering into a formal lease arrangement. As such, the Heads of Agreement may not reflect the entire agreement between the parties and is generally not intended to be legally binding on the parties.

However, the Heads of Agreement may be drafted in a manner that is legally binding, so long as it satisfies the requirements of a valid contract. It is important for the parties to consider if they want the Heads of Agreement to be legally binding.

Legally binding Heads of Agreement or HOA

If the parties would like the Heads of Agreement or HOA to be legally binding then it should clearly state this and must incorporate all the key terms of the lease in the document.

Other indications that the Heads of Agreement is legally binding include:

  • expressing the Heads of Agreement as an offer and the execution of the Heads of Agreement as an acceptance of an offer;
  • attaching a lease to the Heads of Agreement and indicating that the attached lease is amended as per the Heads of Agreement; or
  • indicating in a Heads of Agreement for a lease renewal that the lease is in the same form as the previous lease.

If there are any terms which are not yet certain or included in the Heads of Agreement (HOA), ensure that the HOA provides the machinery for determining those terms.

Non-legally binding Heads of Agreement or HOA

Similarly, if the parties do not intend for the Heads of Agreement to be legally binding on the parties, it is recommended that there are express and clear terms to this effect in the Heads of Agreement, such as “subject to the parties entering into the lease documents” or “subject to the terms of the lease”.

The parties may choose to make some of the terms of the Heads of Agreement legally binding at the time that it is signed, such as confidentiality and payment of deposit terms. If so, this should be clearly set out in the Heads of Agreement.

If you are not sure if the Heads of Agreement is legally binding, it is important to seek legal advice on the terms and enforceability of the Heads of Agreement prior to signing it.

Next steps

Once the Heads of Agreement is signed by the landlord and the tenant, then usually the landlord will instruct its solicitor to prepare the formal lease documents. Once the documents have been prepared the tenant will usually arrange for its solicitor to review the lease documents.

A solicitor can assist each of the parties with further legal due diligence and ensuring that the lease is prepared on terms which are in the interest of that party.

Even if a Heads of Agreement has been signed by both the landlord and the tenant, we recommend that the tenant does not enter into possession of the premises until the tenant has executed the formal lease and provided all of the required items such as the bank guarantee and evidence of insurance.

A tenant should also be wary about spending money regarding the premises until after the tenant has executed the lease documents and been given possession of the premises.

Are you a commercial landlord or tenant renegotiating the terms of a lease? We can help. For further assistance on commercial leases or other property matters, call our Commercial Leasing Lawyers on (02) 6279 4444.


Jennifer Jaeschke, Special Counsel
Commercial Leasing Lawyers
MV Law Canberra
ph. (02) 6279 4444

Sheng Ho, Lawyer
Commercial Leasing Lawyers
MV Law Canberra
ph. (02) 6279 4444