Process and legal
Heads of terms
Non-binding outline of the proposed commercial mortgage terms issued by the lender after credit indication, before full underwriting commits.
Heads of terms is the non-binding summary of the proposed commercial mortgage terms a lender issues to a borrower (typically through the broker) after the credit team has produced an initial indication and before full underwriting. The HoT is the document that gets compared across lenders during a market exercise. It is not legally binding but is the basis on which the borrower commits to valuation and legal cost.
What a UK commercial mortgage HoT covers
A standard heads of terms includes:
- Borrower (named entity, SPV details if applicable)
- Property (address, tenure, registered title)
- Loan amount (and any conditions that could reduce it, such as valuation downvaluation triggers)
- Term
- Pricing (rate type, rate, margin if floating, fix length if fixed)
- Fees (arrangement, exit, valuation, legal, monitoring)
- Repayment basis (interest-only, capital and interest, or split)
- Cover ratios required (ICR or DSCR percentage and any stress assumptions)
- Security package (first charge, debenture scope, personal guarantee amount and form)
- Conditions precedent (specific items required before drawdown: lease assignment, planning, structural survey)
- Covenants (financial covenants tested on an ongoing basis)
- Validity (the HoT typically expires after 30 to 60 days unless the borrower commits)
What “non-binding” actually means
The HoT is heads of terms, not a contract. The lender can withdraw or amend the offer if underwriting throws up issues (valuation downvaluation, credit search problems, lease defects, structural survey findings). Borrowers should not assume the HoT pricing and structure will survive into the final facility agreement unchanged.
That said, in practice, on a clean case, the final commitment letter typically matches the HoT within 5 to 10 basis points of rate and within 2 to 5% of loan amount. Brokers who work consistently with the same lenders learn each lender’s drift pattern.
The HoT acceptance trap
Once the borrower signs the HoT acceptance and pays the valuation fee, they are committed to that fee even if the deal does not complete (the valuation has been instructed and the surveyor is owed). Some HoTs also include non-refundable arrangement fees or commitment fees that bite earlier than completion. Brokers should highlight these line items explicitly to borrowers before signature.