Commercial property transactions can become difficult, expensive or impossible to complete when problems are discovered during legal due diligence.

By that stage, the parties may already have paid for valuations, surveys and professional advice. Funding applications may have been submitted, completion dates agreed and commercial expectations established.

Many risks can, however, be identified before heads of terms are finalised. Early legal input can help test assumptions, clarify responsibilities and reduce the risk of delays or renegotiation.

“Clients are often surprised by how many property issues can be identified before formal due diligence begins. Early legal input is not about slowing a transaction down; it is about ensuring the deal is based on realistic assumptions and has the best chance of reaching completion.”
— James Burgess, Partner

Key takeaways

• Heads of terms should reflect the commercial reality of the transaction.
• Planning, funding, title and access issues should be considered early.
• Completion dates must allow for legal, planning and development requirements.
• Tax, costs and third-party consents should not be overlooked.
• Early legal advice can reduce the risk of costly surprises.

1. Untested assumptions

One of the most common causes of difficulty is the number of assumptions made during early negotiations.

A purchaser may assume that a property can be used for a particular purpose. A developer may expect planning permission to be obtained without undue difficulty. A tenant may assume that alterations or a change of use will be permitted under the lease.

These assumptions may not be tested until legal due diligence begins. If a problem is discovered at that stage, the parties may need to renegotiate the price, timetable or transaction structure.

Before heads of terms are agreed, consider:

• Is the proposed use compatible with planning requirements?
• Are there restrictive covenants affecting the property?
• Are there existing tenants, occupiers or licensees?
• Does the seller or landlord have the rights needed to deliver what has been agreed?
• Are any third-party consents required?

Heads of terms do not replace full legal due diligence, but they should identify the assumptions upon which the deal depends.

2. Unrealistic development timelines

Development projects are particularly vulnerable to ambitious or unrealistic timetables.

A proposed completion date may depend on planning permission, highway works, utility connections, environmental investigations or construction milestones. These matters may involve third parties and may not be entirely within the parties’ control.

Delays can affect funding agreements, development targets and the wider commercial viability of the project.

Before agreeing a timetable, establish:

• Which consents and approvals are required?
• Who is responsible for obtaining them?
• Which dates are critical?
• What happens if a deadline is missed?
• Is a long-stop date extension mechanism needed?

A realistic timetable is usually more valuable than an ambitious one that creates pressure and uncertainty later in the transaction.

3. Funding dependencies

Many commercial property transactions depend upon external finance, including acquisition finance, development funding or third-party investment.

Problems can arise when lender requirements do not match the commercial terms agreed between the parties. For example:

• Funding may depend on planning permission.
• Additional security or guarantees may be required.
• Finance may be released in stages.
• A lender may not be able to facilitate the proposed completion date.
• Development finance may require certain pre-conditions to be met that require the involvement of third parties.

If these issues are identified only after heads of terms have been agreed, the buyer or developer may need to seek an extension or return to negotiations.

The proposed heads of terms should therefore be reviewed alongside the funding requirements. Any important conditions or dependencies should be understood before the transaction progresses.

4. Missing access and service rights

A property may appear commercially suitable but be difficult or impossible to use if the necessary rights are missing, limited or unclear.

This is particularly important for development sites and properties that rely upon neighbouring land for access, utilities or drainage.

Relevant rights may include:

• Vehicular and pedestrian access.
• Rights of way.
• Rights to install and repair utilities.
• Drainage and sewerage rights.
• Rights to use shared access roads.
• Rights to park, load or unload.
• Rights to carry out works on neighbouring land.

The proposed use may also place greater demands on existing rights. For example, rights that are sufficient for a small commercial unit may not support a larger development involving increased traffic, deliveries or utility requirements.

Title documents, plans and existing agreements should be reviewed early on to identify whether the proposed use is supported by the necessary rights.

5. Unclear commercial terms

Heads of terms are often treated as a summary of the price, property and completion date. However, unclear commercial terms can create significant problems when the formal contract or lease is drafted.

The document should clearly identify:

• The parties and relevant legal entities.
• The property or premises involved.
• The price, rent or premium.
• The applicability of VAT and any other tax assumptions.
• The proposed or required transaction timeframes, including any long-stop dates and the ability to extend the same.
• Any conditions or required consents.
• Responsibility for professional fees and transaction costs.
• Whether vacant possession is required.
• Any existing tenants, occupiers or licensees.
• Any required confidentiality or exclusivity arrangements.

For a lease, the heads of terms should also cover the term, rent reviews, break clauses, repairing obligations, service charge, insurance obligations, alterations, assignment and underletting (alienation) permitted use.

The more clearly these points are recorded, the less room there is for misunderstandings or protracted negotiation during the legal drafting and approval process.

Are heads of terms legally binding?

Heads of terms are usually intended to record the commercial basis of a proposed transaction and are commonly marked “subject to contract”. However, the wording, signatures and conduct of the parties can affect their legal status.

Provisions such as confidentiality or exclusivity may also be intended to have legal effect. A solicitor should review the document before it is finalised, particularly where the transaction involves development, funding, planning conditions or third-party rights.

Why involve a solicitor early?

Early legal advice can help identify:

• Title and ownership issues.
• Planning and permitted-use concerns.
• Restrictive covenants.
• Access and easement problems.
• Funding conditions.
• Existing occupational arrangements.
• Tax and cost assumptions.
• Appropriate conditions and deadlines.

This does not necessarily delay negotiations. In many cases, it helps the parties understand what is achievable and creates a clearer route to completion.

Start with stronger foundations

Commercial property transactions rarely fail because of one isolated issue discovered during due diligence. More often, problems arise because important assumptions were not identified or tested early enough.

Planning, funding, title, access and development timetables can all affect whether a transaction is commercially viable. Addressing these matters at heads of terms stage can reduce the risk of delays, renegotiation and unnecessary costs.

Our Commercial Property team advises developers, investors, landlords and occupiers on a wide range of transactions. We can review proposed heads of terms, identify potential barriers and help structure the deal around realistic commercial and legal requirements.

If you are negotiating heads of terms for a commercial property transaction, contact our Commercial Property team to discuss your plans.

This article provides general information and does not constitute legal advice. The legal position will depend on the wording of the heads of terms and the circumstances of each transaction.