Heads of Agreement in Commercial Leasing: Why Every Agreed Commercial Term Should Be Recorded
Summary
A set of Heads of Agreement ("HOA") is generally expressed to be non-binding, but it almost always becomes the reference point for the parties throughout lease negotiations.
If an agreed term is omitted, the other party can later argue it was never part of the deal making it significantly harder to negotiate its inclusion in the formal lease.
For that reason, tenants and landlords should make sure the HOA accurately record every agreed commercial term before signing rather than relying on later assurances or verbal representations from an agent.
Introduction
When you agree to take on a commercial lease, the first formal document you will typically encounter is a set of Heads of Agreement. Many tenants and landlords treat it as little more than a formality: a brief note of what was agreed in principle before the "real" legal work begins.
That is a costly misconception.
Getting your HOA right and understanding what each term actually means can save you significant time, money and frustration further down the line. This article explains what HOA are, why they matter, and what tenants and landlords should look out for before signing.
What Are Heads of Agreement?
HOA are a short summary document, usually prepared by the landlord's agent or solicitor, setting out the principal commercial terms on which the parties have agreed to proceed with a lease. Think of them as the blueprint for the formal lease that the solicitors will subsequently draft and negotiate.
Are Heads of Agreement Legally Binding?
This is where many parties get caught out. HOA are usually expressed to be "subject to lease" and non-binding, meaning neither party is legally committed to proceed until a formal lease is executed. That does not make them unimportant; far from it. Here is why:
They set the commercial framework, which is very difficult to unpick later. Once both parties have signed off on the headline terms, it becomes commercially and practically very difficult to reopen fundamental points such as rent or term during subsequent legal negotiations. Solicitors will be instructed on the basis of what is in the HOA, and deviating from them can cause delays, increase costs, and damage the relationship between the parties.
They expose gaps before it is too late. A well-drafted set of HOA will flush out disagreements over specific terms before significant legal costs have been incurred on both sides.
Important: Even where HOA are headed "subject to lease" or similar, some clauses can still be enforceable. Confidentiality, exclusivity, and deposit or holding-fee arrangements are the common examples. Treat each clause on its merits rather than assuming the entire document is a comfort letter.
Common Mistakes Tenants Make at the Heads of Agreement Stage
1. Agreeing to full outgoings liability without understanding what it covers
Many commercial leases require the tenant to pay a proportion of, or all of, the building outgoings, which can include council rates, water rates, land tax, building insurance, and body corporate levies. If the HOA simply state "plus outgoings" without specifying what is included, you may be committing to costs you did not anticipate.
What to do:
Ask for an itemised schedule of estimated outgoings before agreeing to the HOA. For retail premises, note that state Retail Leases legislation imposes additional disclosure obligations on landlords.
2. Overlooking the condition of the premises and make-good obligations
Commercial leases commonly include a make-good clause, requiring the tenant to return the premises to their original condition at the end of the lease — removing all fitout, repairing damage, and sometimes redecorating. This can be a significant cost if not anticipated from the outset.
What to do:
Negotiate the scope of the make-good obligation at the HOA stage and, if possible, request that a condition report or schedule of condition be agreed and annexed to the lease at commencement.
3. Failing to clarify the conditions for exercising the option to renew
Options to renew are one of the most valuable rights a tenant can have, but they are almost always subject to strict exercise conditions. Failing to give notice within the prescribed timeframe, or being in breach of the lease when the option is exercised, can result in the option lapsing entirely.
What to do:
Ensure any option to renew is clearly documented in the HOA, including the notice period, the mechanism for determining the renewal rent (e.g. CPI, market review, or fixed increase), and the conditions attached to the exercise of the option. Once the lease is signed, diarise all key dates including the window within which the option must be exercised to avoid missing out on the option term.
Common Mistakes Landlords Make at the Heads of Agreement Stage
1. Not including a sunset date in the Heads of Agreement
Without a sunset or expiry date in the HOA, either party can allow negotiations to drag on indefinitely without committing. Including a deadline by which formal lease documentation must be executed, failing which the HOA lapse, protects the landlord's ability to relet the premises to another tenant if negotiations stall.
2. Overlooking demolition or redevelopment clauses
If a landlord anticipates redeveloping the property during the term, failing to include a demolition or redevelopment clause in the HOA (and ultimately the lease) can leave the landlord locked into a tenancy with no ability to recover the premises for development purposes — no matter how much notice the landlord is willing to give.
3. Not addressing make-good obligations from the landlord's perspective
Landlords can also make the mistake of agreeing to HOA that are silent on the standard of make-good required. Without a clearly defined benchmark, it becomes difficult to enforce make-good obligations at the end of the lease. Common examples include returning the premises to "base building" or "cold shell" condition, repainting to a specified number of coats and colour, replacing carpets and flooring, and making good internal surfaces.
Why You Should Involve a Solicitor Before Agreeing to Heads of Agreement
It is a common assumption that solicitors only become involved once HOA have been agreed and signed. In practice, this is often too late.
Having a solicitor review or even assist in negotiating the HOA before they are finalised means:
Issues are identified early, reducing the risk of costly surprises mid-negotiation.
Your interests are properly protected from the outset, rather than being retrofitted into a document the other side has already anchored their expectations to.
Legal costs may be reduced overall, because the formal lease negotiations begin with a clearer set of agreed terms. A solicitor may also identify issues you had not considered, which can then be addressed and included in the HOA before it is finalised.
Key Takeaways
Heads of Agreement set the commercial framework for your lease — treat them seriously, even if they are expressed to be non-binding.
Review every term carefully before agreeing to it.
Ensure any agreed incentives and any conditions attached to them are clearly and specifically recorded.
Involve a solicitor before finalising your HOA, not after.
Do not rely on assurances or confirmation from third parties regarding the terms. If someone tells you a term was agreed but it is not reflected in the HOA, do not sign until the document is updated.
Speak to Our Team
Whether you are a tenant taking on your first commercial premises, or a landlord letting a shop, our property team can guide you through the Heads of Agreement process and ensure that the lease you end up with reflects what you agreed and protects your position throughout the tenancy.