Is a Heads of Agreement legally binding in NSW?

Mostly no. A Heads of Agreement (HoA) is a short document that records the commercial terms agreed between landlord and tenant before a formal lease is drafted. The substantive terms (rent, term, incentive, fitout contribution) are subject to contract and not binding until the lease is signed. However, two clauses in a typical HoA are usually binding even if the deal does not proceed: the confidentiality clause and the exclusivity clause. The exclusivity clause stops the landlord from negotiating with other tenants for a fixed period, usually 30 to 60 days, while the lease is being prepared.

What should I negotiate at the HoA stage rather than the lease stage?

Negotiate the commercial terms at HoA stage because they are much harder to change once the lease is drafted. This includes rent, term, options, incentive (rent-free or fitout contribution), make-good obligations, permitted use, and any landlord works. Also negotiate fitout-specific terms: who pays for AFSS-affected works, who pays for switchboard upgrades, after-hours HVAC charges, and access to the building during the fitout. Once these are written into the formal lease, the landlord has no incentive to vary them.

What is a fitout contribution and how is it different from a rent-free period?

A fitout contribution is a cash amount the landlord pays toward the tenant's fitout, usually expressed in dollars per square metre. A rent-free period is a number of months at the start of the lease where no rent is payable. Both are forms of incentive. Fitout contribution is paid against invoices from the tenant's contractors, often at practical completion. Rent-free reduces cash outflow during the fitout and ramp-up period. The landlord may offer one or both. From a cash flow perspective, fitout contribution is more valuable because it offsets capital cost. From a tax perspective, rent-free has different treatment. Negotiate based on which fits the business better.

Heads of Agreement vs Commercial Lease: What to Negotiate Before You Sign

Section 1

What You Need to Know

A Heads of Agreement (HoA) is a short document that records the key commercial terms a landlord and tenant have agreed to before a formal lease is drafted. It is usually one to four pages and is signed before the lease lawyers get involved. The HoA is the moment where most of the actual negotiation happens. Once it goes to the lawyers, the deal moves toward a formal lease and the levers for change get smaller.

Most of the HoA is not legally binding. The financial terms (rent, term, incentive) are subject to contract and only become enforceable when the lease is signed. The two parts that usually are binding are the confidentiality clause and the exclusivity clause, which stops the landlord shopping the space to another tenant for a fixed period (typically 30 to 60 days) while the lease is drafted.

Why this matters for a fitout: small business owners often sign an HoA assuming it is a placeholder and that everything can be tidied up in the formal lease. In practice, the HoA is where you negotiate fitout-specific terms (AFSS works, services capacity, after-hours access, working hours, loading dock booking). If you do not raise these at HoA stage, the landlord has no commercial reason to vary them once the lease is drafted.

Section 2

The Rules

HoAs are subject to contract. The standard "subject to formal contract" wording means the substantive terms are not enforceable until the lease is signed. Either party can walk away. (Common law contract principles)
Confidentiality and exclusivity clauses are binding. Even if the deal does not proceed, the tenant must not disclose the proposed terms, and the landlord must not negotiate with another tenant during the exclusivity period. Breach can give rise to damages. (NSW contract law)
The Retail Leases Act 1994 (NSW) applies to most shop-front retail premises under 1,000m². If your premises is covered, the landlord must give a Lessor's Disclosure Statement at least 7 days before the lease is signed. The HoA does not replace this obligation. (Retail Leases Act 1994 (NSW))
The HoA should record any landlord works the landlord has agreed to do. If the landlord is upgrading the switchboard, replacing the AC, or removing a wall, write it into the HoA. If it is not in the HoA, it will not be in the lease. (Common practice)
The HoA should record the make-good obligation. Make-good means returning the premises to a defined state at the end of the lease. The default is "base building condition" which can be very expensive. Negotiate the make-good standard at HoA stage. (Make-good clauses, lease law)
The HoA should record the incentive in dollars or rent-free months. A common incentive on a five-year lease is 15 to 25% of total rent, paid as either a fitout contribution or rent-free period. The split is negotiable. (Market practice 2026)
The HoA should record permitted use. "Cafe" is more restrictive than "food and beverage". "Medical" is more restrictive than "healthcare". A narrow permitted use limits your ability to pivot the business or sell the lease later. (Lease drafting practice)

Section 3

What This Means in Practice

The HoA is usually drafted by the leasing agent (acting for the landlord). Their version captures the rent, term, and incentive but leaves out everything fitout-related. This is not malicious; it is just a template. The fitout-specific terms have to be added in by the tenant.

Before you sign the HoA, walk through the fitout in your head from day one to opening day. Where does the kitchen exhaust discharge? Where does the new MSB tap into base building? Who pays if the building's existing AFSS needs an update because of your fitout? Who pays for the after-hours HVAC during night-time fit-out? Each of these is a future cost. Each one is much easier to push to the landlord at HoA stage than to negotiate after the lease is drafted.

Common items to negotiate at HoA stage that get missed: building manager access during fitout, fitout guide compliance (if the landlord has one, ask for the latest version), AFSS access if any of your works affect the building's fire safety measures, services capacity sign-off (electrical kVA, water flow, gas demand), after-hours HVAC charges (often $30 to $80 per hour for the tenancy zone), and loading dock booking procedures.

The make-good clause deserves its own conversation. The default in most leases is to return the premises to "base building condition" at lease end, which means stripping the fitout back to bare slab, services capped, and ceilings removed. On a $250,000 fitout, the make-good cost can be $30,000 to $60,000. Negotiate "make-good to existing condition at lease commencement" or "no make-good required" at HoA stage. Once the lease is drafted, the agent will resist changes.

Incentive structure also affects the fitout cash flow. A $50,000 fitout contribution paid at practical completion is different from 4 months rent-free at the start of the lease. The first reduces capital cost. The second improves cash flow during the ramp-up months. Most landlords will offer one or the other; a few will split. Calculate which matches the business model better and negotiate that at HoA stage.

Finally, the HoA usually has a deadline for signing the formal lease, often 30 to 60 days. If the lease is not signed by that date, the exclusivity falls away and the landlord can negotiate with another party. If your DA or CDC is on a longer timeline, ask for a longer exclusivity period or a conditional clause that ties exclusivity to approval progress.

Section 4

Key Decisions to Make at HoA Stage

1

Lock in the Make-Good Standard

The default "base building" make-good can cost $30,000 to $60,000 on a typical small business fitout. Push for "make-good to condition at lease commencement" or "no make-good". This is one of the highest-leverage negotiations at HoA stage.

Trade-off: Landlords resist this because base-building make-good gives them flexibility for the next tenant. Offer to take the premises in its current condition (no landlord works) in exchange for reduced make-good. Most landlords will accept the trade.

2

Negotiate Permitted Use Broadly

Ask for the broadest permitted use the landlord will accept. "Food and beverage" is better than "cafe". "Healthcare and allied health" is better than "medical centre". "Office and showroom" is better than "office only". This protects you if the business pivots and is critical if you ever want to assign the lease.

Trade-off: Landlords prefer narrow uses because it lets them control the tenant mix in a multi-tenant building. Be prepared to compromise to a defined list rather than an open category.

3

Identify Landlord Works in the HoA

If the landlord has agreed to upgrade the switchboard, replace a chiller, or fix a leak, write it into the HoA with a date. Vague promises ("the landlord will address services capacity") become disputes once the lease is drafted. Specific commitments ("landlord to upgrade tenancy switchboard to 200A by lease commencement") are enforceable.

Trade-off: Specifying landlord works makes the HoA longer and more contentious to draft. The protection is worth it on any item over $5,000 in value.

4

Confirm Services Capacity Before Signing

Before HoA, ask for the existing electrical capacity (kVA), water supply (DN size), and gas supply (if applicable) at the tenancy boundary. Compare against your fitout demand. If the existing capacity is too small (common for old buildings being converted to new uses), the cost of upgrading falls on the tenant unless you negotiate otherwise. Get a building services engineer to do a 1-hour services capacity check before signing.

Trade-off: A pre-HoA services check costs about $500 to $1,500. It can save tens of thousands in unexpected upgrade costs. For tenancies in older buildings, this is the single highest-value pre-signing diligence item.

5

Lock in Incentive Structure and Payment Triggers

If the incentive is a fitout contribution, agree the payment trigger (lodgement of CDC, practical completion, certificate of occupancy, etc.) and any documentation required (tax invoices, statutory declarations). If the incentive is rent-free, agree the start date (lease commencement vs first day of trading). Vague incentive terms cause disputes that take months to resolve.

Trade-off: The detailed payment trigger language slows down HoA drafting. The protection is critical because most fitout cash flow problems come from delayed incentive payments.

Section 5

Who Needs to Know What

Section 6

References

Retail Leases Act 1994 (NSW), Lessor's Disclosure obligations
NSW Small Business Commission, Commercial leasing guidance
Property Council of Australia, Commercial lease market practice notes 2026
Law Society of NSW, Commercial leasing practice resources