COMMERCIAL REAL ESTATE – LEASE MANAGEMENT

Query 1

Commercial Landlords and Tenants often need guidance on lease management after they have entered into their lease. Here is an example of an enquiry we recently received for a Tenant who occupies an industrial unit where its needs for the premises changed. We guided them through the process of coming out of their current lease, saving them rent, and without breaching any of the lease terms. 

Q: Can the lease end?

A business operates from an industrial unit; the business is expanding and it will soon outgrow its current premises. The business owner has found suitable alternative premises to move to. Can they end their current lease early and take on a new lease and is it possible to avoid paying two lots of rent.

A: Yes - It may be possible. Here are the main options:

The business is bound by the terms of the lease meaning that it is obliged to continue to adhere to the Tenant covenants for the duration of the term.

1. It can terminate the lease earlier than the end of the term on a specified date if there is a Tenant’s break clause but the break may be subject to  conditions, which must also be complied with to validly end the lease.

2. If the lease does not contain a Tenant’s break clause, the business may be able to assign the remainder of the unexpired lease term. The lease will stipulate  conditions such as the following which must be followed strictly:

   
   

   · to obtain Landlord’s prior written consent in the form of a licence to assign;

   · to enter into an authorised guarantee agreement (often shortened to AGA) - the effect of the AGA means the business will remain liable to the Landlord for the Tenant covenants if the assignee (the new Tenant) defaults at any time during the remainder of the lease;

   · the Landlord may require the assignee to pay a rent deposit and/or nominate a guarantor of good financial standing; and

   · to cover the Landlord’s legal and other costs in addition to their own legal costs, in some cases, and depending on the bargaining strength of the parties the assignee may agree to cover all or part of the landlord’s costs.

   
   

3. The business could sub-let the premises if the lease permits, but it will have to comply with any conditions in the lease and as with an assignment it must obtain the Landlord’s written consent (in the form of a licence to sub-let). It should also consider its ongoing obligations to the Landlord after the sub-lease has been granted; as the Tenant it will remain liable to the Landlord for rent and Tenant covenants under their lease, and specifically if the sub-tenant defaults.

   
   

4. an approach can be made to the Landlord to negotiate an early surrender of the lease. This is usually incentive driven, where if it cannot find a replacement Tenant, it may agree to pay a reverse premium to the Landlord. Be careful to get tax advice on the treatment of reverse premiums as both VAT and Stamp Duty Land Tax can apply.

In each scenario above, the Landlord is entitled to serve a schedule of dilapidations with a quantification of costs detailing the repair and condition of the premises as required under the lease.

Practical Steps

Whilst  it may be possible to end the current lease early, it will largely depend on the lease's specific terms and the willingness of the Landlord to negotiate. It is advisable for the Tenant to seek legal guidance to ensure its actions comply with the lease and to explore its options fully. Its solicitor will audit the lease and advise on the most viable options having considered the implications and potential penalties.

Opening dialogue with the Landlord early; should be considered; the Landlord may prefer a surrender, if it can re-let quickly.

Ensure any arrangement is formally documented. Plan the timing so the business can vacate before the new lease starts to avoid overlap. Discuss the terms of the new lease with the solicitor as there may be further opportunities to avoid doubling up on rent.

Contact Harshinder Hundal on 0808 172 93 22 for Commercial Real Estate advice or complete our quick contact form  for a no obligation discussion.

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  This update is for general guidance only and advice should be taken in relation to a particular set of circumstances.