My company has three leases of different offices. Owing to the current economic climate we no longer need all this space. We need your advice!
Q - The first office is in a nice location and we have found someone who wants to take the lease. They are an established company with a good trading record. We have applied to the landlord for consent to assign but have heard nothing. Is there anything I can do to speed things up as I am worried our assignee may start to look elsewhere?
First, we should check your application has been correctly served on the landlord. Your application should have been made in writing and be as detailed as possible; at the very least it should include the proposed assignee’s accounts, references and, if applicable, details of proposals for any guarantors and rent deposits. We should also check the lease and make sure you have satisf ed any conditions set out in the assignment clause.
Provided the lease permits you to assign it there is a statutory duty on the landlord to give consent unless it is reasonable for him not to do so. He must also give you his answer in a reasonable time. This will vary depending in the facts of each application, although we should certainly be thinking more in terms of days or weeks. If you are worried the proposed assignee may walk away then we should make this clear to the landlord. If the landlord requests more information, we should provide it as soon as possible (being careful the correspondence could not be construed as a fresh application).
We can then consider our tactics as to whether we hassle the landlord for a response or allow the reasonable period in which he has to respond to elapse. In the circumstances above the preference will probably be to hassle him for a response. Obviously the best outcome is to get the consent to the assignment and avoid any disputes.
Q – In our second lease we are no longer using the space. We did look to try to assign the lease but the rent we are paying is much higher than the open market rent so no one is interested. We thought about underletting to try to recover at least some monies, but the underletting clause in the lease says that we cannot underlet at less than the rent we are paying. Is there anything we can do?
Any proposed undertenant would of course need to be satisfactory to the landlord but provided this is the case there are a couple of options to consider here.
We would need to look at the lease but provided it does not say you cannot grant a lease subject to a reverse premium, one option is that you could pay to the proposed undertenant a reverse premium equivalent to the reduction in rent being offered. We would need to discuss how such a premium was paid and whether it can be paid in instalments so as to protect you against the risk of the undertenant disappearing/going bust.
Another option is for a third party (for example a group company) to indemnify the undertenant for the difference between the passing rent under your lease, and the rent that you have agreed with the undertenant.
In this scenario, the rent contained in the underlease is the same as that in your lease and, indeed, the tenant is obliged to pay this, so you are not in breach of the underletting provisions in the lease. The third party then agrees that on each quarter day it will refund to the undertenant the difference between the rent under your lease and the rent which you agreed the undertenant would pay for the property. There are def nitely issues to be considered with this and the company providing the indemnity would certainly need to be a strong covenant (or pay the equivalent of the indemnity upfront into an account) but it is something we can look at.
Q - We’re a little unsure what to do with our third property; we have a break right next year which we may or may not exercise. What do we need to think about now?
Even if you are unsure whether or not you want to utilise a future break right, it is imperative you look at the lease now and get advice from your lawyers – good planning is essential for a clean break!
The lease may set out certain conditions you need to comply with in order to effectively break the lease, eg a time for serving notice on the landlord, vacant possession, payment of rent and compliance with tenant covenants – these will be interpreted strictly so it is essential you fully understand what is required. The timing of satisfying any condition is crucial. If they are not met, you are at risk of not having exercised your break properly and the costs of being tied to the lease until the end of the term.
Even if you decide not to exercise your break, it can still be used as a strong negotiating tool with your landlord. Often a break date will coincide with a rent review date so opening a dialogue with your landlord early on and using the threat of the break clause may assist in agreeing a more favourable reviewed rent or other benef ts, eg a rent-free period, an extended service charge cap, the grant of a reversionary lease with capped rents etc.
Q - I did have a look at the lease a while ago and vaguely remember seeing something about material compliance with tenant covenants – what should I do?
If you have a break clause condition which insists on material compliance with tenant covenants you will need to get advice from your solicitor and perhaps also a surveyor as soon as possible to agree an exit strategy. Spending a modest amount of money on advice now will be worth it in the long run when weighed against the potential for arguments with your landlord about whether or not the break has been properly exercised, or the risk of being tied to a lease of space you no longer need for a number of years.
There has been a lot of uncertainty as to what exactly ‘material compliance’ means. Great care should be taken to prioritise the meeting of this condition. It is not an option simply to leave the premises in disrepair and hope for the best – the break will be ineffective. It may be advisable to enter into without prejudice negotiations with your landlord to agree a schedule of works or indeed make a payment in lieu of complying with the tenant covenants in the lease.
Q - I am concerned about our liability for dilapidations for the three offi ces, how can I limit our exposure?
In relation to the f rst off ce, if you do manage to assign the lease then any dilapidations claim will be the responsibility of the new tenant. You will not retain any liability in this case.
As for the second off ce, underletting that property will not have the same result as an assignment and your landlord may, at the end of your lease, have a claim against you for disrepair. However, you should remember that your liability for breaches of the repairing covenants is limited by statute to the diminution in the value of your landlord’s reversionary interest as a result of those wants of repair. If your landlord can show no such loss it will not have a claim against you. I should also add that if the property is ripe for redevelopment and there is evidence to show that your landlord may be intending to redevelop then you may well escape any liability.
If your landlord does have a claim against you for breaches of the repairing obligations, you may be able to pass some of that liability to your undertenant. Whether or not you can do this will depend upon the terms of the subtenancy. For example, the undertenant may insist upon having a schedule of condition attached to its underlease limiting its liability for repairs. You will need to avoid this in order to maximise the potential of recovery against the subtenant.
Insofar as the third off ce is concerned, depending upon the wording of the break clause you may well have to comply with the repairing obligations contained in your lease in order for the break to be effective. Certainly if the break is conditional upon material compliance with the tenant covenants you will have to put the off ce back into a good state of repair. Any insignif cant breaches of the repairing covenant in number, value and nature ought not to invalidate the operation of the break.