In the merry season of goodwill, and with landlords feeling wobbly as a result of the Brexit and 2017’s election (in addition to a glass too many during the festivities), tenants should carefully consider what to put on this year’s Christmas list.
Heading into a cold new year of a possibly uncertain economic climate, businesses need to be able to adapt to changing markets and ensure that their lease terms provide maximum flexibility to support them. On the basis that the success of the tenant’s business should ensure that the landlord is paid its rent and not be left with an empty property, it might be worth existing tenants approaching their landlord (or making a New Year’s resolution to do so), to try and vary their current occupational arrangements to adapt to any changing business needs. Points to consider may include:
Can the space be re-configured easily to enable employees to be moved from two properties into one building, or to create self-contained areas with a view to subletting part, to assist with outgoings and rent?
Can the tenant assign and/or sublet easily without being expected to comply with onerous conditions?
Can the tenant underlet part, grant licences or concession agreements, or share occupation with group companies?
- Break Clauses
If the lease contains a break clause but the tenant wishes to stay, can the tenant negotiate a rent free period in exchange for not exercising its right to break?
If the mid to long term future is uncertain, is there any scope to alter the timing of any break dates (effectively postponing them), or to introduce additional breaks?
- Rent Reviews
Although upward only reviews to market rent are still the norm, index linked reviews and “cap and collar” (limiting how high and low the review can be) are being agreed by some landlords, and turnover rents in retail properties are still considered. Alternatively, it might be preferable to negotiate a fixed stepped rent in place of a review.
If the rental value has decreased since the last review it may be worth trying to agree a rent reduction. In addition, the timing of payments could be altered (for example from quarterly to monthly) to help with cash flow.
- Service Charges
Is the service charge capped? If not, is it worth scrutinising the service charge provisions and budget to ascertain whether the service charge represents value for money? The RICS Service Charges in Commercial Property provides best practice recommendations which landlords are being encouraged to follow.
- Repair and Dilapidations
Tenants taking new leases should definitely consider limiting their repairing obligations in older buildings to keeping the property in no worse state than as evidenced in a schedule of condition produced at the start of the lease. In new builds, rather than having to take the risk of pursuing builders under warranties, tenants could try and exclude damage caused by latent or inherent defects from their responsibilities. Especially in shorter leases where the tenant is not granted security of tenure, excluding a tenant’s liability for damage caused by uninsured risks is also becoming more common.
Vacating tenants should consider whether their landlord is taking a reasonable stance on dilapidations, by bearing in mind any future plans which the landlord has indicated they may have for the property.
In entering into negotiations, it is worth bearing in mind the Code for Leasing Business Premises in England and Wales 2007, given that this is designed to achieve a fair balance between the parties and give greater flexibility to lease terms.
Tenants can also benefit from expert help (surveyors, accountants and lawyers) to assist in the negotiations, and to consider whether there are any tax or other implications as a result of any re-gearing or variation of current lease terms. This could be especially helpful if Christmas parties are taking their toll, or the last minute shopping and deliveries are proving hectic and diverting tenants’ attention from business matters!
Here’s to 2018 – may it be a happy new year for tenants!
This is not legal advice; it is intended to provide information of general interest about current legal issues.