15 November 2014
How occupiers of business premises can reduce their liabilities
When a business wants to keep its liabilities down when it gets rid of its lease - what are the options? We look at what they can do, and how to do it.
Options depend on your lease. You may be able to:
- stay in the premises and renegotiate;
- terminate the lease, under a break clause;
- negotiate termination with the landlord;
- assign the lease - i.e. sell it to a new tenant;
- sub-let the premises, or part of them.
Staying and renegotiating:
Tenants can sometimes renegotiate their lease, but you have to understand your landlord's objectives and be able to meet them, as well as your own – for example, your landlord may want to avoid periods without rent, having an empty property, and to protect the value of their premises.
The circumstances also have to be right – for example, it will help if it is a buyer's market, the lease term ends shortly or there is an imminent break date.
Key bargaining chips are extending your lease term and/or giving up break options. These may mean the landlord is prepared to agree a rent-free period, a reduced rent, a return of your rent deposit, or removal of rent reviews, especially if they ultimately plan to sell or want to refinance the property. You could also try to negotiate more flexibility if you need to sub-let or assign the premises, or make alterations to them, and reduced repairing obligations.
Be careful how you put the new terms in place. Entering into a new lease automatically extinguishes the old one, while varying an existing one does not – but it can be hard to tell whether your variations are so significant that they (inadvertently) mean you have entered into a new lease. Consider providing that the new terms only come into effect when the old one expires.
Termination under a break clause:
If you can terminate at a specified point, because there is a 'break clause' in your lease, you may have no continuing liabilities to the landlord. Check the notice you have to give, and that you have complied with conditions in the lease, such as keeping the premises in repair (breaches – no matter how small - may lose you the right to terminate).
Termination - no break clause:
If you can negotiate termination, you may have no ongoing liabilities to your landlord but they will try to get you to pay –often a significant fee for terminating, payment of professional fees and payment for repairs and redecoration.And they often won't negotiate at all unless they have a more attractive tenant waiting in the wings, or want to redevelop the premises and can't do so while you are in them.
Finding a new tenant to take over your lease - someone to 'assign' it to - is usually the best way of realising any value it has, but leases for fewer than three years often prohibit assignment or you may need your landlord's consent - which usually can't be unreasonably withheld. There may be restrictions on use that limit who you can assign to.Also, the assignee must usually meet certain financial criteria and give security.
If you can assign, and it's a very old lease, you might remain legally liable to the landlord for all future payments owed by future tenants. For more modern leases, you will usually have to guarantee some or all of the next tenant's payments. The landlord will try to negotiate other payments from you that you may be able to pass onto, or share, with the new tenant.
Assignment negotiations can cost more and take longer than negotiations to terminate your lease. First, you have to find the new tenant, and may have to pay an agent to help. Second, you have to negotiate with both the new tenant (who will pay the landlord's professional fees? Will the new tenant pay you a premium, or vice versa?) and the landlord.
If your lease has less than two years to run, it's probably better to negotiate to terminate the lease, to avoid the costs and risks of assigning it.
Rental from sub-letting could cover part or all of your rent and leave you free to move, but sub-letting won't get you out of the lease. You retain all your liabilities as a tenant and you have the additional burden of managing your sub-tenant.
Sub-letting may not even be allowed - check the lease for restrictions on sub-letting - or you may need the landlord's consent, which can mean you have to show your landlord that the intended sub-tenant has the necessary financial standing.
You will want to try to pass as many of your liabilities on to the sub-tenant as possible. However, this is not always possible, as sub-tenants will often refuse to agree to, for example, obligations to carry out full repairs.
Strengthen your hand
Whether negotiating fresh terms or an assignment, sub-let or termination with the landlord put yourself in the landlord's shoes:
- Is the market strong? The more potential reliable new tenants out there, the more reasonable the landlord is likely to be with you.
- Does the landlord have cashflow problems? If so, they may want a quick agreement.
- Has the landlord breached the lease? Use that in your negotiations.
- You need judgement, experience and a good knowledge of the local market, so use both your own - and your advisers' - negotiating skills.