Flexibility in leases from the tenant’s perspective
When in unusual times as these, flexibility is key to all businesses.
As lockdown measures are lifted and we are faced with whatever is going to be the ‘new normal’, business premises will still remain integral to most, even with our new found remote working skills!
So when entering into leases of business premises going forward, the ability to adapt will be imperative and needs to be built into lease negotiations.
The following areas will be key in providing flexibility for tenants.
The ability to assign or sublet the property will remain very valuable for the tenant, as it provides a way out should you no longer want the property.
Just to clarify, subletting is where you grant a new lease to another occupier but you remain the tenant liable under the original lease. Assignment is where you pass the lease to a third party who becomes the tenant and takes on all liabilities under the lease.
Any ability to assign or sublet will be expressed as being subject to the landlord’s prior consent which cannot be unreasonably withheld. The landlord will, of course, want to check that the proposed assignee or subtenant is of sufficient financial standing in order to comply with the lease terms and pay the rent.
Your lawyer should ensure that any ability to assign or sublet is not subject to overly onerous conditions. For example, a landlord can require a tenant on assignment to enter into an authorised guarantee agreement whereby the outgoing tenant stands as guarantor to its immediate assignee. You will therefore, be liable for your assignee’s breaches. If possible, this requirement of an authorised guarantee agreement should only arise where the assignee is of weaker financial strength than you.
You often see a lease providing that any subletting must reserve a rent no less than the passing rent payable under the main lease. This must be resisted as otherwise, the property will be unlettable in a falling market, which is exactly the time you will be looking to sublet rather than assign if you want to dispose of the premises.
Make sure the length of lease is appropriate for your business needs.
A tenant should push for break rights that give an opportunity to end the lease at a time that suits the tenant’s business. Beware however, the pre-conditions that need to be satisfied before you can break the lease. These should be limited to no arrears of fixed rents come the break date and handing back the premises free from any third party interests.
A pre-condition that there are no material breaches of covenant at the break date should be resisted as there can be no certainty as to whether such a condition has been complied with. What is meant by a “material breach”? Unless a pre-condition can be satisfied with certainty, there is a risk of the right to break being defeated by the landlord and the tenant remaining liable for the rest of the term. As you can imagine, in the current economic climate landlords are likely to seize upon any opportunity to avoid the break so as not to lose their tenants.
Ideally you will want a lease that is protected by the Landlord and Tenant Act 1954. This gives you a statutory right to renew the lease at the end of the term unless the landlord can prove specific grounds for opposing, the most common being redevelopment or the landlord wanting to occupy the premises itself. If the lease is contracted outside of the 1954 Act, then the landlord can refuse to grant a new lease at the end of the term and insist that you leave the premises.
The lease will specify what you can use the property for and will also place restrictions on permitted signage and alterations. Generally speaking changes of use and the carrying out of alterations will require landlord’s consent, which cannot be unreasonably withheld.
Make sure these provisions are not overly restrictive and the lease does not prohibit anything that you might need to do for your business purposes. Remember also, if the permitted use and alterations are so restrictive that they can only apply to your particular use of the premises, they may well result in the lease being unassignable or unlettable to a third party should that third party want to use the premises for a different business.
Make sure that the landlord consents at the outset to any alterations or fit out works which you need to carry out before you can commence trading from the property.
Be aware of any requirements to reinstate at the end of the term any alterations you have carried out during the term. The cost of putting the property back into its original condition could be a significant expense for the business when coupled with general dilapidations and disrepair liability as referred to below. Reinstatement and disrepair are completely separate heads of expenditure.
The standard obligation is to keep the property in good repair and this includes an implied obligation to put into good repair. As such, the tenant will be liable for any existing disrepair unless the repairing obligations are suitably qualified. Ideally you will agree with the landlord that you are only required to keep the property in no worse condition than it was in when the lease was entered into, as evidenced by a photographic schedule of condition which is annexed to the lease.
If the landlord does not agree to this qualification or where you are taking an assignment of an existing lease which contains full repairing obligations, take professional advice and have the property properly surveyed so you are aware of any disrepair which you will be taking on and the likely cost of putting the property back into good repair.
If you have any queries or would like any advice on this topic, please do not hesitate to contact David Stone on 01752 203500 or email david.stone@GAsolicitors.com