In the first of a series of posts we will talk about the key points to be considered when negotiating heads of terms. As we have discussed in previous posts, dark stores are a hot topic currently offering many opportunities to property investors. We therefore thought that to contextualise this discussion we would tailor our comments for dark stores, but the points raised will be equally applicable across other asset classes.

• Details of the Parties - The first point to iron out is who the parties are. In the context of dark stores there is an increased likelihood that the dark store will want the tenant entity to be an SPV rather than an existing company with material assets. This brings into play various questions of covenant strength which the landlord will need to get itself comfortable with and, if uncomfortable, it should require either a guarantor or a rent deposit (discussed below) for additional security.
  
  
• Rent Level - The next question is that of rent. Is this to be an open market rent? Or, alternatively, a turnover rent or stepped rent?
  
  A good property agent will be able to assist with calculating a proper market rent and advising whether a turnover rent or stepped rent might be suitable. As with the majority of HOTs items, it will then be a question of commercial negotiation to agree the most appropriate rent provisions.
  
  A note on turnover rent: The last two years has seen a notable increase in the number of leases being granted at a turnover rent. A turnover rent is, by its nature, not fixed and brings risks for both parties. That being said it could be beneficial for both landlord and tenant as it could enable the landlord to share in any profits generated by the dark store and, conversely, could ensure that the dark store tenant only pays rent when it is profitable. The risks to both parties should be clear and the landlord may well want to require the use of a base rent with a turnover rent top-up payment so that it has at least a base level of security and certainty.
  
  It is worth noting that an institutional landlord, or a property investor whose exit strategy is a sale to the institutional market, may be more reluctant to agree to a turnover rent than a property investor who intends to hold the property asset in the long term or is less risk averse. This is simply because the institutions look for guaranteed income streams over fixed periods.
  
  Any landlord considering a turnover rent should ensure that it has scrutinised the dark store tenant's accounts and business plan. Any tenant considering a turnover rent should be conscious of how high the rent might rise if its profits soar.
  
  
• Rent Frequency - A related question to that of rent level is how frequently rent will be paid. Because dark stores are more likely to be SPVs, or businesses which are otherwise in their infancy, it may well be that the parties agree that the tenant can pay rent monthly (rather than the more traditional quarterly arrangement) to assist with its cash flow.
  
  
• Rent Free Period - The third key rent question is whether the tenant will receive a rent free period. It is normal practice for a tenant to have a rent free period equivalent in length to their fit out period but the tenant should discuss with its agent whether any longer rent free period could be insisted on.
  
  
• Rent Deposit - As above, while dark store tenants are in their infancy stages, we would expect landlords to require some security in case the tenant is unable to pay its rent or there is an insolvency event. A rent deposit is often seen by landlords as preferable to a guarantor as it provides a ready pot of funds, held by the landlord, which it is able to call upon without recourse to the tenant or the courts. A guarantee on the other hand is dependent on the covenant strength, and cooperation, of the guarantor and so whilst not subject to the fixed limit of funds offered by a deposit is generally more difficult to enforce and subject to fluctuations in value dependant on the covenant strength of the guarantor.

In our next post we will discuss term, the application of the Landlord and Tenant Act 1954, rent review and break rights.