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11/04/2011

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Breaking free

Lisa Raymond looks at the ways in which a tenant can extricate from a leasehold property that it no longer wants

 

In the aftermath of the credit crunch many tenants are left with property that they no longer want. Perhaps you are a tenant with shops that are no longer performing, a factory where production would be better moved elsewhere or an expensive HQ which you would like to move out of town?

Once the desire to relocate or shed property has been identified, it is time to look at the nature of that property ownership.

Surrender
This is the cleanest and easiest way to end leasehold obligations. Unfortunately it is also the method least likely to be agreed by landlords. This is because a landlord must consent to a surrender and is not likely to do so where the property may not be readily re-let or is over rented (currently let to you at a higher rent than the landlord would be able to achieve now on the open market). It is always worth asking however as the Landlord may wish to redevelop or have someone else interested in the property or have other reasons for wanting the property back and may not otherwise have approached you.

If the landlord does consent surrender is usually done by a deed signed by both parties in a prescribed manner. Surrender will bring to an end your lease obligations from the date of surrender but it is important to remember that this will not necessarily mean an end to all expenditure after that date.

If you are lucky enough to have secured a ‘yes’ from your landlord it is a good idea to have your lawyers look at or draft the deed of surrender. They should ideally be looking to make sure that there will be no end of year service charge liability billed to you (where you are in a shopping centre or retail or industrial park for example) or that your dilapidations liability is minimised or waived. Dilapidations are items of repair that you have not attended to during the term of the Lease and that the landlord can effectively bill you for after termination. This often comes as a nasty surprise especially when you may think that surrender has ended your property liabilities.

Therefore it is important to understand that while surrender will end your future liability under the lease, it does not automatically absolve you from payments or liabilities that have already incurred but which you may not anticipate paying.

Assignment
This is where you find a new tenant for the premises and pass on your lease to that tenant. You will need the right to do this under your lease but very few leases prohibit this absolutely. If you have a lease that does prohibit this it is still worth asking as I have known a number of instances where the landlord has agreed realising that the current tenant may no longer be a good bet and the incoming tenant is in fact a better option.

Assuming your lease does allow assignment it is common to find that landlord’s consent must be obtained. In most cases this cannot be unreasonably withheld meaning that if you present a  convincing case to the landlord it will have to give consent.  Note that the case must revolve around the incoming person not around your desire to leave although that can sometimes be a helpful prompt.

The incoming assignee must supply references and financial information sufficient to convince the landlord that it will be able to comply with the rent payments and lease covenants. It is common to find the landlord asking for security from the incoming tenant where this is not obviously the case.

To avoid wasted costs it is often a good idea to obtain landlord’s consent first – at least in principle – to the incoming assignee.

While assignment will usually end your liability for dilapidations or future payments, there is one important point to be aware of. That point is called “original tenant liability”. If your Lease started in 1995 or earlier ( it does not matter if you only became tenant yourself due to assignment after that date it is the date of the lease that matters) original tenant liability will bite. This liability operates to make each tenant under the lease liable until the end of the term.

This will mean that even if you assign in 2011 you can still be responsible for rent and other payments in 2015 and beyond (provided the lease has not ended). This is still the case even where the lease has passed through many hands since leaving yours.

In today’s climate it is unfortunately becoming all the more common to find that liabilities long written off by companies as belonging to old leasehold interests come home to roost. There are however, limits as to what a landlord can demand of you once the lease has left your hands so you should seek advice if you find yourself on the receiving end of a demand like this.

If assignment is still your best option – having considered all exit routes – it is worth asking the landlord if it would consider releasing you on assignment. If the incoming tenant is particularly strong the landlord may be minded to agree. Nothing ventured, nothing gained and we have seen some surprising results when tenants have asked.  If the landlord does not agree however there is not much that can be done about this.

If your lease was entered into in 1996 or later the position may be better. This is because automatic original tenant liability was abolished (in most cases – like everything , there are some exceptions) and replaced with an option for the landlord to ask its current tenant to guarantee the obligations of the incoming tenant. The notable exception from the previous position is that you can only be asked to guarantee the obligations of the tenant you assign to. If and when it assigns on again you are free.

Not ideal but an improvement. The landlord can also only request this in specific circumstances and sometimes you may not be obliged to give the guarantee at all. As with all these options it is hugely important to get advice on what you can be asked to do if this is pivotal to your decision.

Subletting/sharing/similar arrangements
You may not be looking to wave goodbye to your property forever. Perhaps you just want to try a venture in a different location but keep your options open to return to the original property. Or you may have valuable rights granted in the lease which you cannot exercise if you give the lease away completely but you do not wish to use them now. One such example may be a right granted to purchase the entire freehold.

In such a case subletting or even sharing or — in certain industries — parting with possession to a franchisee or under a Management Agreement can be the answer. Particularly in the retail and leisure industry these are popular options as some scenarios can fall outside the radar of landlord’s consent or remit.

In all these cases you remain tenant under the lease and therefore responsible to make rent payments and observe and comply with the lease terms but have a separate agreement with your subtenant/franchise, under which they agree with you to be responsible for all or most (depending on what you can negotiate) of those lease terms.
Another circumstance in which subletting can be useful is where your property is overrented – i.e. the rent is higher than what could be achieved by a new letting now. This will therefore mean you are unlikely to be able to assign the lease as no-one would want to pay a rent over the market level unless there are special reasons but you could sublet at less than the rent you are paying which will go some way in helping to alleviate the burden of the property.

There are a number of factors to consider here. First some leases prohibit subletting and those that do allow it invariably require landlord’s consent to a number of factors. Some require consent to the subtenant itself and some require consent to the rental level or the other terms of the sublease. Some will allow the landlord to ask for security (such as a rent deposit or guarantee) meaning that you will be unlikely to be able to obtain that as well thus leaving you less well protected than you otherwise would be.

Subletting may also not be suitable for your needs as it will involve ongoing commitment with the property – on a management basis in making rent payments to the landlord and monitoring lease compliance by the subtenant and in dealing with any breaches or failure to pay.

Exercising a break right
Some leases contain a break clause which is a right to end the lease early. These can be in favour of either the Landlord or Tenant or both but here we concern ourselves only with your right as tenant to end the lease early.

First off – you cannot end the lease early without a specific right to do so. It is always worth checking your Lease but if you cannot remember a specific right being negotiated and agreed at the time you became tenant then it is probably isn’t there.

Assuming you have a right to break it is crucial to look at the wording of the part of the lease creating it. It is very common to find such rights being conditional on you doing certain things or on certain circumstances arising. Without such conditions being complied with the break will be ineffective. Common conditions are that a sum of money is paid when the break is exercised or vacant possession rights are given back to the landlord.
All break rights are dependent on the right notice being served on the right party in the right manner at the right time. Seemingly straightforward but there is a rash of Case law where unfortunate tenants have come unstuck trying to comply with the exacting requirements of serving a valid break notice and have then gone through the Courts trying to get the notice declared as valid but have been unsuccessful.

It is money well spent to have your legal advisors go through your break right with a fine toothcomb checking matters such as pre-conditions to comply with and the dates and times and any monies that must accompany the break notice. Of course all of this should be done well in advance rather than by burning the midnight oil the night before.

There is nothing worse than telling your Board that your rental liabilities will cease on a certain date only to find that this is not the case after all and that they may continue for another 10 years!

Assuming this is all in order make sure your break right entitles you to a refund of any rents or other monies paid in advance of a period before the break right. Otherwise you may not automatically get these payments back.

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