Heads of Terms for property transactions – How to get it right

Lucy Beachell, solicitor in Harrison Drury’s commercial property team, outlines the key information provided in a Heads of Terms agreement and how this can make a property deal run more smoothly.

‘Heads of Terms’ or a ‘Notification of Sale’ can act as an extremely useful guiding document to the parties and advisers involved in the buying and selling of land and property.

However, it is surprising how often parties to a deal miss the mark when providing these details, leaving their advisers with inadequate information, and potentially delaying or even jeopardising the transaction.

The result of this is often increased costs for the client as more time is spent by solicitors dealing with matters which should have been covered by the seller and buyer in advance. Below we have set out a summary of what solicitors need when considering Heads of Terms.

Parties to the deal

Often the parties to a deal are not listed or described correctly, whether this be due to missing middle names or just inserting initials followed by a surname. Another common error is inserting the details of directors of a company, rather than the name and company number of the limited company. This may seem trivial, but it can result in a file being opened incorrectly, conflict checks not being able to be carried out and added correspondence in clarifying these points.

Parties’ details

Another common omission is the contact details for the parties. Solicitors want as a minimum, an email address for the other party and their solicitor, together with current address details and telephone numbers. It saves time, and therefore money, not having to search the internet for the relevant details.

Plans

Often solicitors are provided with inadequate plans which are not Land Registry compliant and do not contain sufficient detail to identify the property in question by reference to the land registry. This means time is wasted by trying to cross-reference online maps with Land Registry records to establish the title number for the property or to ascertain it is unregistered. Details of what makes a plan Land Registry compliant can be found here on the government website.

Rights and Reservations

Land is often sold without any discussion as to whether rights are required over land being retained by the vendor or whether rights need to be reserved over the land being sold. Examples of such rights are as follows:

• Rights of way including their extent. I.e. at all times for all purposes or limited to a certain number of dwellings.
• Rights to services including their extent i.e. limited to a certain number of dwellings.
• Rights to discharge for septic tanks/sewerage treatment plants.
• Rights to enter onto the land sold/retained to carry out work/repairs to the land sold/retained.

These are fundamental matters, which should be agreed from the outset between the parties. The reservation of a right of way may seriously restrict a buyer’s intended use of the property to the extent it may frustrate the deal. These matters should therefore be covered from the outset to avoid  a sale going abortive at a later stage of the transaction when potentially significant costs have been incurred.

Positive Covenants

We often ask a seller or buyer whether there is anything specific they would like the other party to do on completion. More often than not, they will say they want them to erect a new boundary fence, gateway or access, yet the heads of terms are silent. Furthermore, when this wish is conveyed to the other side, they are often annoyed or disappointed because it incurs added costs to them, which they had not factored into their acquisition costs/proceeds of sale. This creates tension and resentment between the parties meaning the finer details can become contentious and heels can become dug in.

Restrictive Covenants

Restrictive covenants should be ascertained and agreed from the outset of a transaction. If a seller tries to impose these after heads of terms have been agreed, it can cause unnecessary angst between the parties and result in arguments over the sale price. Sellers should be asking themselves whether there is anything they want to prevent taking place on the land and make this clear to a buyer from the outset so that they can take these matters into account when making their offer.

Overage

Overage is becoming more common as time goes on as people are reluctant to forego the potential development value land has in the future. However, overage deeds are fraught with complexities and require detailed consideration of a number of matters such as those set out below.

By agreeing these matters with buyers and sellers from the outset, significant amounts of time will be saved when the solicitors turn to drafting and agreeing the form of the deed and conflict/animosity between buyer and seller is less likely to develop later on in the transaction when it transpires the buyer was not aware of the overages inclusion or the buyer and seller were on very different pages as to how the overage would be implemented.

• Overage Period: How long is the Overage to bite for?
• What does the overage cover, is it to cover residential only i.e. allow for commercial development? Are you happy to allow equestrian use of the land subject to the overage? Remember, this is different to agricultural use.
• What is the trigger for the overage being payable? Is it the grant of planning permission or the sale of the property with the benefit of planning permission/implementation of the planning permission? This is critical to a buyer for cash flow reasons.
• Is the overage to apply to detailed and outline planning, or just detailed planning?
• What are the permitted disposals? Is the buyer to be allowed to grant easements and the like without the original landowners’ consent?
• What are the valuing assumptions for ascertaining the base value of the property and the uplifted value with planning permission? Is the valuer to assume the development has all the easements needed for the development to occur? All these factors influence the overage payment in the future so need to be carefully thought out.

For more information on this subject, or any other commercial property matter, contact our Commercial Property team on 01772 258321.