Short-term lease, long-term problems

Over the Christmas period and increasingly at other times of the year, opportunistic retailers are entering into short-term tenancy agreements for vacant retail units on high streets up and down the country. While historically, Christmas was the time that you’d see pop-up shops appearing. Now these short-term lets are increasingly becoming the norm, mainly due to the troubled economy that has played such a large role in the fortunes of the commercial market in recent years.

Undoubtedly, landlords and tenants are still generally pessimistic that the economic recovery has arrived. We are yet to see tenants of good covenant occupying every single vacant property on high streets in England and Wales.

This being the case, these short-term lettings appear to present a ‘win-win’ situation for prospective tenants who are reluctant to tie themselves into anything approaching a institutional style lease term and for landlords who are keen to shift the burden of empty rates and other overheads onto tenants, if only for a short time.

However, the very nature of short-term lettings means that there are risks to landlords who need to be aware of some inherent dangers, however keen they may be to see their premises let.

Even with a standard form of short-term letting that can be rolled out for each property within a landlord’s portfolio (thus minimising professional fees), the nature of the businesses that are likely to use these short-term lets (with some notable high profile exceptions) will potentially increase risks to landlords.

For example, should a tenant sign a tenancy agreement for two or three months and then decide after a week that things simply are not working out, they may simply disappear overnight. Whilst the terms of a standard lease would allow the landlord to pursue the tenant for outstanding rent in this situation, it may not be worth the landlord’s time to do so with a short-term tenant. Of course this depends on the rent payable, the landlord’s prerogative and importantly, the ability to find the tenant once they have gone. Not only does this present logistical difficulties but, should the landlord manage to locate their former tenant (or simply obtain judgment in default), they may find that they are actually not worth suing. The tenant may not have the assets to cover the debt, even if they don’t contest the fact that rent is owed. And if the tenant is a special purpose vehicle set up simply for taking the short-term let, then a landlord may find that even through the courts, the chances of recovering rent are slim or non-existent.

Depending on the negotiation skills of the landlord, it is certainly worth their while asking for some form of security deposit up front before the tenant is allowed into the premises to potentially cover not only the payment of rent during the lease term but also the cost of possible dilapidations at the end of the let. Again, depending on the landlord’s prerogative, tenants may (if poorly advised or not advised at all) enter into a repairing covenant far beyond that which they would expect to take on under a short-term lease. Should judgment be obtained against any tenant for a dilapidation claim, then this security deposit (if tied in by way of an appropriately drafted rent deposit deed) will cater for the costs of any repair works which arise as a result of the tenant’s occupancy.

Just because the let is a short-term one that is temporary in nature does not mean that due diligence on any prospective tenant should be overlooked. If properly advised, the landlord will be able to make an informed commercial decision on the level of due diligence he wishes to undertake before accepting a new short-term tenant. Property agents provide an invaluable service in that regard. A point to consider is whether the directors of the company would be prepared to offer personal guarantees that would cover the obligations of the tenant company in addition or instead of a form of rent deposit. This request, from my experience, is certainly something which concentrates the minds of the directors of any company.

Landlords would do well to also bear in mind the practical issues that can arise from these short-term lets. Assuming that a landlord has taken on the responsibility for the cost of utilities following a previous tenant’s departure, landlords must ensure that its insurance company and utility providers are updated on the new tenant’s arrival. Insurers are very keen to know when properties are empty and the landlord will not want the hassle of convincing utility providers that they are not responsible for their tenant’s bills for the period they are in occupation.

Contractually, the tenant (under any properly drawn short-term lease) would be responsible for the cost of all utilities, rates and so on for the period of their occupancy. That document will govern the relationship between the landlord and the tenant but a third party, such as a utility company, will not be concerned with that and will argue that it is the landlord’s responsibility, should their name be on the bill, to convince the utility company it is not their debt.

Similarly, landlords would not want the headache of trying to convince their insurer to pay for damage caused to the premises by their tenant where the insurer is unaware that the property was occupied. Although it may be tempting for a landlord to simply allow a tenant into occupation given the obvious benefits of rental income and the passing of overheads and business rates to the tenant, the agreement between the landlord and tenant needs to be documented correctly. A failure to document the proper terms of the agreement can lead to disastrous consequences for the landlord, such as the potential for the tenant to accrue security of tenure (where the tenant holds the right to renew his tenancy for a term of up to 14 years).

Simply documenting a tenant’s occupancy as a licence will not be enough to defeat a savvy tenant’s claim that they have security of tenure. If the ‘pop-up tenant’ ends up being in occupation of the retail unit for a period exceeding 12 months (not impossible if all parties are happy with the arrangement and simply allow it to continue on a relatively informal basis) then this could be the worse case of scenario for a landlord who could find himself stuck with a tenant that he only intended to have a short-term relationship with.

Not only would this prevent potential lettings to a tenant of better covenant, but, unless the landlord can rely on one of the specific grounds set out in the Landlord and Tenant Act, the landlord will have a very difficult time removing the tenant from the premises. This will prejudice the landlord’s ability to quickly obtain a market rent for the premises (assuming that the market would have picked up when the landlord seeks to do this) and of course, the relationship with any tenant seeking to impose these rights will become strained.

Whilst it is not all bad news for landlords, short-term leases with these pop-up retailers do have their downsides and landlords should proceed with caution before opening up their premises to this kind of tenant. Short-term leases still present the opportunity to avoid those ubiquitous empty rates and will line landlords’ pockets at a time when the market is still depressed, but if professional advice is not taken, a landlord could be left with a whole host of other, more pressing problems that come as a nasty surprise.

Matthew Williamson is an associate in the commercial property team at law firm Weightmans LLP. Email: matthew.williamson@weightmans.com