Jason Goldsmith outlines points to be aware of for business occupiers disposing of their lease or looking to mitigate lease liabilities.
In difficult times tenants might need to reduce their property costs. Commercial property solicitor, Jason Goldsmith, reviews a number of approaches and highlights key points and the latest developments for businesses to consider.
Assignment is where you transfer the whole of your interest in a lease to someone else.
Although assigning a lease seems like a clean solution, there are hurdles to overcome. Landlord's consent will be required and the proposed assignee will have to satisfy the usual financial tests and provide suitable security.
There is also a sting in the tail: if the lease was granted before 1995 then you will retain liability for performance of lease covenants by your successors in title. This applies until the end of the lease term, no matter how many times it is assigned. So if an assignee defaults, the landlord has the ability to require you to make good the default.
If the lease dates from 1996 onwards, then you will still be required to guarantee the performance of the lease covenants, but for your immediate successor only. This guarantee, known as an authorised guarantee agreement, falls away when your immediate successor assigns the lease. Sometimes a lease also requires that any current guarantor of your lease also participates in an authorised guarantee agreement. Recent cases have clarified that this obligation can sometimes be void.
Sub-letting is where you lease the whole or part of your interest in a rental property to someone else.
This approach is not as as much of a clean break as assignment because you remain in situ for the remainder of the term acting as a post box for the payment of rents. In the event of breach, you remain the landlord's first port of call for enforcement . As the tenant remains on the hook for all the lease covenants, it will be important to ensure that these are offloaded as far as possible onto the sub-tenant. However, it is not always possible to do this, particularly in relation to the repairing covenants where subtenants are often reluctant to assume the full repairing obligation, thus leaving you with a shortfall. Also, if the subtenant fails to pay their rent then you will still have to pay your rent!
It might be difficult to find a potential subtenant who wants to take the whole of the leased area, but the ability to sub-let part is often restricted under the lease. Also, if the potential subtenant will only pay less than the passing rent then this arrangement can sometimes also be prohibited. A final point that often complicates matters is that, as with assignment, the landlord will want to be satisfied regarding the financial standing of the proposed subtenant.
Unless the landlord has plans to redevelop or has another tenant lined up, surrender is unlikely to be a realistic option without paying a significant premium.
This is renegotiating the key terms of a lease in a manner that allows tenants and landlords to accomplish key commercial objectives
Some tenants have been successful in re-gearing their leases. This approach is unconventional and it requires understanding your landlord's objectives clearly. Sometimes it can benefit a landlord to renegotiate key terms of the lease on the basis of a tenant giving certain concessions.
If you are lucky enough to be approaching a break date, it still pays to be wary to ensure that lease liabilities come to an end when expected. Conditions attached to break clauses need to be strictly observed and some recent cases have emphasised this. Where a break clause required all rent to be paid up to the break date and a tenant's cheque for £150 had not cleared at the break date, the court ruled that the attempt to exercise the break clause was ineffective.
To sum up, all the methods for mitigating leasehold liabilities can involve clearing significant hurdles or leave you with residual liabilities.