BLM23040 - Defining long funding leases: commencement and transition: pre-existing heads of agreement: outline

A pre-existing heads of agreement is an agreement or common understanding that is evidenced in writing (see BLM23045) between the lessor’s side and the lessee’s side (see BLM23050).

The written evidence of agreement must include the principal terms of the proposed lease as defined in FA06/SCH8/PARA27, namely

• the identity of the lessee (see BLM23050),
• the identity or description of the asset to be leased (see BLM23055),
• particulars, or a description, of the rentals payable under the lease, and
• particulars, or a description, of the term of the lease.

See BLM23060 where the agreement refers to two or more assets.

The requirement for the ‘particulars, or a description’ of the rentals means that the rentals do not have to be precisely specified. The condition would be met, for example, by

• a draft schedule of rentals payable, even if it is qualified by uncertainties over the cost of the asset and rate of interest to be assumed, or
• a description of the rentals that, for example, said that the rentals would be based on the cost of the asset and spread evenly (or rise in specified increments, or whatever) over the term of the lease and be based on an assumed interest rate of LIBOR plus a set amount.

To be ‘described’ it should be clear whether the lease rentals will be even or, if incremental, by how much they will rise, and when. Similarly the rate of interest should be indicated, even if only provisionally. The idea is that the final rentals will be clearly recognisable as derived from the details in the pre-existing heads of agreement.

You should accept that the pre-existing heads of agreement contains ‘particulars, or a description’ of the term of the lease only if it is clear what the intentions of the parties were regarding the term of the lease.

You should refer cases of doubt or difficulty to CS&TD (BAI) after having obtained the relevant documents.