Print, or rather newspapers, is a classic example of change. Where Fleet Street is a metonym for British newspapers, the reality is that printing that started there in the 16th century mostly moved out in the 1980s to cheaper locations. The last news organisation to leave, Reuters, moved in 2005 to Canary Wharf.
Moving presents problems and cost regardless of premises being freehold or leasehold. Each has a different route out.
Differing options
Jessica Booz, a partner, and commercial property solicitor at VWV, says that options for a freeholder depends on what the owner wants to achieve. They can sell their property, lease it to another to produce an income while retaining ownership, or they could choose to take out a mortgage if finance needs to be raised.
But for a leaseholder, matters are more complex says Booz, with options of assignment, subletting and the utilisation of any break clauses that are available.
Alternatively, she says that “it may be possible to talk with the landlord to negotiate a surrender of the whole or part of the property depending on the market at the time”.
However, as Nathan Hinks, an associate at Wright Hassall, explains, this may not be automatic as “a landlord may agree an early surrender of a lease, but there is no obligation on them to do this – it will be in their gift”.
The pandemic has seen some tenants look to get out of their lease because they have struggled to maintain footfall and income due to lockdown measures. Break clauses may have provided them a valuable escape.
It’s interesting that not many realise that, as Booz highlights, in some leases either a landlord or tenant can end a lease before the end of the contractual term. So, as she says, “break clauses can be a valuable asset for a tenant wanting to end their obligations early”.
It should be noted at this point that break clauses can be fixed or rolling. In describing both, Hinks says that “a fixed break clause is usually exercised on a fixed date during the lease term. In comparison, rolling break clauses are exercisable at any time during the term, upon sufficient notice”. Tenants should understand which they may have and how they operate.
Making the break
Break options are often subject to conditions which must be complied with; if not, then a landlord can refuse to accept that the lease has come to an end.
As with anything legal, good advice is essential says Booz. This is because “there are often long notice periods, sometimes six months or more, needed before a break can be exercised; it’s important that time periods are not missed.”
And Hinks thinks the same, adding that not serving notice correctly is a serious risk and so his first point of reference is the lease as it may prescribe a particular form of notice. Ideally this would have been negotiated and agreed during the drafting of the lease “so that the tenant is clear on its responsibilities in serving the notice and the landlord is required to act reasonably in accepting this.”
And there is notable case law for the enforcement of conditions: Lord Hoffman in Mannai Investment Co Ltd vs Eagle Star Life Assurance Co Ltd 1997 famously pointed out that “if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on a pink paper”.
A common condition that Booz draws attention to is how to give up occupation. Here she says that “it is important that conditions are negotiated carefully; some conditions, such as a condition to provide ‘vacant possession’ can be difficult to comply with”.
Hinks explains more. He says “The requirement for vacant possession is considered an onerous obligation. It is much more commonplace now to see reference to a property being returned ‘free of a tenant’s occupation or continuing sub-leases’.”
Another requirement is for a tenant to be up to date with rent, and this, says Booz, “could also include interest on any historic late payments”. Worryingly, she says that a landlord doesn’t have to confirm to a tenant whether they are up to date with rent, etc, they could choose to wait until after the time for exercising the break has passed before claiming that a break wasn’t validly exercised.
And then there’s the matter of dilapidations, also known as repairing covenants, that cover premises condition when handed back.
Hinks explains that the end of the lease “usually acts as a trigger to review dilapidations issues since the tenant’s obligations to reinstate and yield up the premises become relevant”. He advises that once a break notice is served it is likely that the landlord will begin preparing a schedule of dilapidations.
Another noteworthy point for Hicks is the concern that a landlord may still be able to pursue a dilapidation claim. In fact, he says that “landlords may find it easier to claim for dilapidations upon the termination of a lease because there are fewer statutory restrictions”.
Consider the impact of covenants – these too can be problematic. Hinks has seen first-hand that tenants must follow all covenants and not be in material breach of repairing covenants. As a result, he recommends that “tenants ask their landlord to accept the break notice upon payment of an agreed amount to cover any outstanding breaches”. He also thinks it fair to “ask a landlord for confirmation of the steps the tenant needs to take to comply with any conditions, while also requesting a schedule of dilapidations in relation to any repair works”. And if there is disagreement over any outstanding sums due, he recommends paying “on a without prejudice basis and disputing the matter later”.
But with the potential for so many terms that need to be met to exercise a break, tenants are advised to protect their position by keeping evidence of compliance including how the notice was delivered.
Lastly, for those moving to new premises, there’s a warning from Booz: “Make sure that the negotiations on them are completed well in advance to avoid having to move items into storage if the new premises are not ready.” She reminds that it is critically important to leave on or before the day of the vacation as staying longer can also invalidate a break option.
There’s no break clause…
Break clauses are common, but they’re not universal. However, Booz says that organisations in this situation could see if the lease allows a tenant to assign the whole of the lease to another. Alternatively, they may be able to sublet part or the whole.
In terms of assignment or subletting Hinks says that landlord consent may be required “which can be subject to certain conditions being met which are usually contained in the lease”.
The advice to tenants, therefore, is to check for conditions that need to be complied with before assigning or subletting. And Booz gives an example: “A landlord will want to know that the new party occupying their premises is able to pay the rent and comply with the lease terms. This means you may have to provide accounts and/or references for the incoming tenant; the landlord may be allowed to demand a guarantor or rent deposit from the new tenant.”
Thankfully, she says that in most cases, a landlord cannot unreasonably withhold or delay giving their consent. Instead, that they must respond quickly and reasonably to any request to assign or sublet.
Nevertheless, Hinks adds that a landlord can refuse if there are any arrears of rent or any other sums under the lease, or “if it considers that the proposed tenant or undertenant is not of sufficient financial standing.”
With a note of caution, Booz warns tenants thinking of subletting “that they remain liable for compliance with the terms of the lease, including the payment of rent. Being no longer in occupation and so able to control compliance with the covenants under the lease could make this difficult”.
In comparison, under an assignment, the primary obligation to pay the rent and comply with other covenants such as repair moves to the new tenant. However, says Booz, “an outgoing tenant is often required to provide a guarantee to the landlord which means that if the new tenant does not comply with the lease, the landlord may still yet pursue the original tenant”.
So, with, in Hinks’ view, serious potential for a liability to remain, this “may not always be a clean break and so may not be suitable if a tenant is looking for a ‘cut and run’”. He says that due diligence on those taking over an assigned or sublet lease is essential.
One last point from Booz. It makes sense to ensure that a sub-lease terminates a few days before the end of the main lease. As she puts it, “this ensures that the original will be able to give vacant possession to the landlord at the end of the lease to avoid the penalties that flow from not doing so”.
A negotiating tool
It’s logical for tenants to consider an upcoming break clause as a way to negotiate a better deal. However, Booz says that landlords are aware of this tactic and says: “It is vital that any negotiations are concluded before the time for exercising the break expires as any leverage the tenant may have had expires at that point”. She’s seen landlords push negotiations out deliberately.
And, of course, a tenant wanting to negotiate needs to consider whether they really are wanting to move. Again, Booz has seen landlords call a tenant’s bluff. She says to remember that “once a break notice is served it cannot be withdrawn unilaterally and a tenant would then be in the unenviable position of having to negotiate a new lease with their landlord, potentially on worse terms than before”.
Owners, mortgages and sales
While leasehold is a large part of the market, many own their commercial premises under a mortgage. For them, Booz’s recommendation is talk first to their mortgage provider before acting as the amount outstanding and any fees may sway the decision. She adds that borrowers should “ensure that the sale produces enough funds to satisfy the mortgage and that enough will be left over afterwards”.
Decision made, selling can be as difficult or harder than selling a home. Outdated buildings, high business rates, and changing local use all have a bearing on demand. However, a solution to the latter, at least, is a formal change of use approved by a local planning authority (LPA).
Fortunately, as Booz details, following the introduction of the very wide Class E in September 2020 “many properties now have a greater degree of flexibility to move between a wide variety of uses without express permission for change of use”. An example of this is shops, restaurants, financial services, and offices all now being within Class E.
But if a different class of use is sought then Booz says that planning permission will usually be required: “The LPA will take things such as noise, odour, contamination risks and hours of opening into account when deciding whether to grant permission for the change.”
And it shouldn’t be forgotten that while formal permission may not be required for change of use, if building work is required to make the property suitable for the new use then planning permission may still be required.
Summary
There are numerous ways of disposing of property. The common thread to all is that good legal advice is necessary for both those leaving and taking on premises; it’s very easy to act in haste and repent at leisure.
