Whether its foot fall or outside seating, hospitality businesses know that the right location can transform a business’ fortunes. What are the hurdles that you face when exiting a location? Commercial property solicitor, Jason Goldsmith reviews a number of approaches, and highlights key points and the latest developments for businesses to consider.
Assignment is where you transfer the whole of your interest in a lease to someone else. Although assigning a lease seems like a clean solution, there are hurdles to overcome. Landlord consent will be required, and the proposed assignee will have to satisfy the usual financial tests and provide suitable security.
There is also a sting in the tail: if the lease was granted before 1995, then you will retain liability for performance of the lease covenants by your successors in title. This applies until the end of the lease term, no matter how many times it is assigned. So if an assignee defaults, the landlord has the ability to require you to make good the default.
If the lease dates from 1996 onwards, then you will still be required to guarantee the performance of the lease covenants, but for your immediate successor only. This guarantee, known as an authorised guarantee agreement, falls away when your immediate successor assigns the lease. Sometimes a lease also requires that any current guarantor of your lease also participates in an authorised guarantee agreement. Recent cases have clarified that this obligation can sometimes be void.
Subletting is where you (the tenant) lease the whole or part of your interest in a rental property to someone else. This approach is not as much of a clean break as assignment because you remain in situ for the remainder of the term acting as a postbox for the payment of rents. In the event of breach, you remain the landlord’s first port of call for enforcement. As the tenant remains on the hook for all the lease covenants, it will be important to ensure that these are offloaded as far as possible onto the subtenant. However, it is not always possible to do this, particularly in relation to the repairing covenants where subtenants are often reluctant to assume the full repairing obligation, thus leaving you with a shortfall. Also, if the subtenant fails to pay their rent, you will still have to pay your rent!
It might be difficult to find a potential subtenant who wants to take the whole of the leased area, but the ability to sublet part is often restricted under the lease. Also, if the potential subtenant will only pay less than the passing rent, then this arrangement can sometimes also be prohibited. A final point that often complicates matters is that, as with assignment, the landlord will want to be satisfied regarding the financial standing of the proposed subtenant.
Unless the landlord has plans to redevelop or has another tenant lined up, surrender is unlikely to be a realistic option without paying a significant premium.
This is renegotiating the key terms of a lease in a manner that allows tenants and landlords to accomplish key commercial objectives.
Some tenants have been successful in re-gearing their leases. This approach is unconventional and it requires understanding the landlord’s objectives clearly. Sometimes it can benefit a landlord to renegotiate key terms of the lease on the basis of a tenant giving certain concessions.
If you are lucky enough to be approaching a break date, it still pays to be wary to ensure that lease liabilities come to an end when expected. Conditions attached to break clauses need to be strictly observed, as recent cases have emphasised. Where a break clause required all rent to be paid up to the break date and a tenant’s cheque for £150 had not cleared at the break date, the court ruled that the attempt to exercise the break clause was ineffective.
To avoid premises licence holders retaining personal liability, it must be ensured that the buyer is under an obligation to transfer any premises licence on or before completion.
To preserve any entitlement to claim capital allowances that may exist, it is important that you liaise with your accountants as soon as possible.
To summarise, all the methods for mitigating leasehold liabilities can involve clearing significant hurdles or you may be left with residual liabilities. Please speak to us about establishing the best approach for you.
Jason Goldsmith is a solicitor in Keystone's Commercial Property Team specialising in commercial real estate work with a particular focus on the hospitality sector.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.