15 March 2010
At a time when achieving financial savings can make a real difference to the survival of a business, it makes sense to take advantage of any opportunity to reduce expenditure.
The fixed cost of renting premises is always going to be a major outlay and will vary considerably depending upon the type of business.
What many tenants don't realise however, is by taking the initiative well before a lease is due to expire, they can reduce costs considerably - something which is especially important when commercial rents have dropped considerably.
One key element to consider is whether a tenant has security of tenure. This means the tenancy automatically continues at the end of the contractual term set out in the lease. It only changes when a new lease is negotiated or the tenant serves a notice of termination.
If rents are high, security of tenure sees the tenant continuing to pay a higher rent as there is little incentive for the landlord to want to renegotiate.
However, in a falling rental market it is nearly always in the tenant's interest bring the contractual term to an end as soon as possible and the way to do this is by serving a section 26 notice on the landlord.
Take a typical scenario of a business tenant with a lease coming to an end in the next 12 months. The tenant is paying rent at £50,000 per year and wants to stay in the premises - but current rental levels have probably fallen to about £30,000 per year - what should he do?
• If he does nothing - and the landlord also does nothing - then at the end of the contractual term of the lease the tenant simply remains in the premises paying rent at £50,000 and continues to do so until he serves a notice terminating the lease or eventually agrees a new lease with the landlord. Not very cost effective when he could have been paying a much cheaper rent months or even years earlier!
• Alternatively, the tenant could serve a section 26 notice between 6-12 months prior to the end of the contractual term making it clear that the lease ends on the last day of the contractual term, after which a new lower rent becomes payable. The tenant can then remain in the premises and negotiate a new lease, but at least the new market rent will take effect from the end of the contractual term, and he will be in a strong negotiating position to agree the terms of a new lease.
Unfortunately, a tenant isn't the only one who can change the terms of agreement. A landlord can serve a section 25 notice on a tenant offering a new lease with effect from a date up to 12 months away. If this happens, it negates the tenant's ability to serve a section 26 notice, putting them in a weaker negotiating position and having to chase the landlord to agree the terms of a new lease.
Another option available to tenants is the tenants ability to exercise a break clause, if the lease has one, as this will bring the contractual term to an end earlier, again offering the tenant the chance to work on reducing the fees. Keeping strictly to dates is essential though - serving notice even one day late can make a notice totally ineffective.
There may be other options in your lease, but they are complex documents and every case is different. There are many dangerous technical traps for the unwary. To be sure of making the right moves, speak to B P Collins' expert commercial property team, who can advise on how to turn an expensive lease into a more cost effective one.
Call Maria Mowberry on 01753 279087, complete the complete the online enquiry form or email comproperty@bpcollins.co.uk. |
