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Heads of agreement

The commercial terms upon which parties agree to enter into a lease between the parties are usually set out in a document called:

  • a "heads of agreement" (HOA);
  • a "lease proposal"; or
  • a "letter of offer".

The HOA is executed by both parties and its terms form the basis of the lease.

A critical issue for parties to consider when entering into an HOA is the point at which the parties intend to be bound by the lease. An HOA commonly states when the parties intend to be bound. Generally, parties do not intend to be bound until the lease has been negotiated and signed, at a minimum, by the tenant.

When conditions must be satisfied before parties are bound to a lease

If an HOA states that the parties will not be bound to by the lease until either:

  • the documents are signed by both the landlord and the tenant; or
  • the approval of the landlord or the consent of the landlord's mortgagee is obtained,

then it is imperative that the tenant does not:

  • enter into possession of the premises; or
  • (if there are commercial reasons for entering into possession of the premises) spend any money in relation to the premises.

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