Commercial Leasing in Ireland: Key Considerations for Heads of Terms

What are Heads of Terms?

Heads of Terms outline the key commercial terms that have been agreed between the parties.

Whilst not typically legally binding, a well-structured Heads of Terms can set the tone for the lease transaction and agreement on these issues in advance can allow legal negotiations to progress more efficiently.

The following overview highlights the key considerations we most frequently encounter in practice, and which should be taken into account when agreeing Heads of Terms.

The Key Terms

Demise and Repair

The extent of the demised premises will inform the tenant’s repair obligations, with tenants taking an internal‑only demise having different repair obligations from those taking an entire building.  Most leases will also require the Tenant to keep the premises in good and tenantable condition and having a Schedule of Condition prepared before entering a Lease can help limit exposure. 

Rent Free Periods and Rent Review

Rent free periods are sometimes agreed at a commercial level as a tenant incentive.  Unless otherwise agreed, it is usually the case that a rent-free concession will relate to the actual “rent” only and not to any other payments such as service charges or insurance contributions.

Since the Covid-19 pandemic some tenants may seek a mechanism for rent suspension or rent reductions should any periods of forced closure arise.  These clauses will be heavily dependent on bargaining power and the type of property in question. 

Rent review clauses are usually contained in commercial leases and provide for the rent to be reviewed periodically at agreed intervals, typically every 5 years.  There is a statutory prohibition on upwards‑only rent reviews since 2010 and parties now use a range of mechanisms to review rent with open market rent reviews arguably being the most popular.

Assignment and Subletting

Landlord consent is generally required for assignment or subletting and under Irish law such consent cannot be unreasonably withheld.  An appropriate balance should be struck between the Landlord retaining sufficient control and the tenant having sufficient flexibility to assign or transfer the lease, particularly to group companies.

Break Options

A break option provides for an early termination of a lease, before the expiry of the agreed term.  Tenant only break options are the most common but occasionally landlord break options may arise. In either case, break options will be strictly construed and where the option is made conditional upon the satisfaction of certain obligations, those obligations must be met if the option is to be validly exercised.  This can introduce some uncertainty for a party seeking to rely on a break option.  Ideally, the Heads of Terms should set out if there are any such conditions to the exercise of the break option. 

Guarantees and Other Forms of Security

Landlords may seek personal guarantees or guarantees from parent companies of a tenant.  A full primary obligation guarantee will generally treat the guarantor as the tenant if the guarantee is called upon.   

However, release mechanisms can be put in place following proof of financial strength and/or a financial cap can be included, limiting a guarantor’s liability to a specific amount.

Alternatively, a cash deposit could be retained by a landlord as security for the performance by the tenant of its obligations, instead of a guarantee. 

Renunciation of Renewal Rights

A tenant in occupation of a commercial premises for five years or more may acquire statutory rights to renew their lease on certain grounds under the Landlord and Tenant (Amendment) Act 1980. However, these renewal rights can be voluntarily waived by the tenant, through a Deed of Renunciation which is signed when entering into the lease.

Renunciation of renewal rights is usually agreed at the Heads of Terms stage, and it is important that tenants carefully consider the implications of such a renunciation before agreeing to it.

Conclusion

Commercial leases are complex documents that create long‑term obligations for both landlords and tenants.  Heads of Terms which are based on a clear understanding of the key terms combined with early, informed negotiations can significantly reduce risk and ensure that the lease supports the commercial needs of all parties.

At Power Law LLP, we advise clients across all sectors on the negotiation, drafting and completion of commercial leases.  For further details on this or related matters, please reach out our Property & Construction Partner Cathal Hester and Associate Aoife Daly any member of the Power Law team.

This article should not be regarded as a substitute for legal advice from Power Law LLP. Legal advice should always be taken before acting on any of the matters discussed above.