Premises rationalisation – reviewing your lease commitments and planning for future needs

read time: 7 mins

Where (and how) businesses work has been evolving rapidly as the pandemic has developed, alongside a sea-change to the commercial property market. We look at some of the potential scenarios businesses may be faced with when reviewing their real estate needs now and for the future.

  1. Our lease is about to come to an end. We want to stay, but think our property is over rented and we are paying too much rent. What should we do?

This can be an important and all too often misunderstood issue. Businesses should understand that if the lease is “within the 1954 Act” (meaning there is statutory protection and a renewal right), service of a Section 26 Request for a new lease can be the only way to protect and recover any overpaid rent. Sitting back, and relying on negotiations and landlords’ (and their advisers’) goodwill, is often the wrong approach to take. 

  1. Our lease will come to an end soon. We like the building, but have too much space. What options do we have?

A buzzword right now is repurposing. Many businesses are looking at their property needs, and the way in which space is used and occupied. Increasingly it is possible for the “processing and production” side of things to be carried out remotely, and a recognition that the need for rented space is to facilitate the now infamous “3 C’s”: Collaboration, Communication, and Creativity. A break clause (if already in the lease) may facilitate a negotiated surrender and grant of a new lease; subletting part of the property to an undertenant (an assignment of part is impossible); and the terms of any renewal lease which may all be considerations to think through.

  1. We want to share the occupation of our premises with clients and other businesses we work with. Is this allowed?

With many businesses looking to collaborate and reduce their overheads, this question is increasingly topical. The answer usually depends on the so called “alienation” provisions in the lease. Typically these will set out the tenant business’ entitlement (or otherwise) to share the use and occupation of the property. Where the parties are connected there may be group company considerations, making things easier. There will also be commercial considerations with any shared occupation arrangements, such as confidentiality, security, insurance etc.

  1. We have an option to break our lease coming up. We understand this can be high risk and problematic for business tenants. What do we need to know?

Recent case reports are testimony to the fact that for many years break notices have been one of property law’s most contentious areas. Invariably the devil is in the detail. In one case it was held that if a lease requires a notice to be served on pink paper then in order to be valid it must be served on pink paper. Among the numerous trip-wires and things to check are that the break notice is served by the correct party, on the correct party, in the manner and format prescribed by the lease, in good time before the critical date, and that any conditionality of the break (at the time the notice is served / when the lease terminates) is complied with strictly. 

  1. We want to assign our lease because our property is over rented. Is this a problem? If we assign the lease are we still liable?

Unfortunately in this scenario there is a real risk that the deal will become protracted, and possibly fall through. The situation will require careful navigation. Again, the devil will be in the detail, and the precise terms of “alienation” provisions in the lease will be key. If the lease is a “new lease” (meaning that it postdates 1995) the tenant business will not be liable after the assignment unless the landlord requires something known as an “AGA” – an Authorised Guarantee Agreement. The lease should be checked for any prescribed form of AGA.

  1. We like our premises and want to stay, but need to reconfigure the fit-out and carry out some alterations. Is there anything we should be aware of? 

Minor alterations are often permissible under the lease e.g. to install internal demountable partitioning. Invariably, however, commercial property leases will contain a covenant against alterations, either prohibiting them entirely (for example if they are structural) or allowing them (and say a fit-out) on terms to be agreed. Tenants must appreciate that they could be at risk of a claim for financial damages, and potentially of their lease being forfeit and terminated, if any requisite prior permission, which will usually be written, is not in place. Business tenants will also want to be careful to ensure that any alterations carried out at their expense are not rentalised (that is to say used as a basis to increase the rental value), to the landlord’s benefit, on any future rent review. Business tenants will also need to understand if they might be required to reinstate and remove the alterations at the end of the lease and if so how much that might cost and how long it could take.

  1. We will leave the property when our lease comes to an end and are concerned dilapidations will be an issue. How can we manage and minimise this financial risks?

Sometimes business tenants can make very significant savings. Invariably an early dilapidations plan, and exit strategy, are essential. Timely negotiations might lead to an early negotiated settlement, and agreed payment in lieu of the dilapidations liability. Any ability to pass on all or part of the dilapidations liability, for example to a subtenant, should be assessed as soon as possible. Sometimes tenants will be best placed to carry out at least some works and repairs, for example when the professional advice is that liability for some items is likely to be clear-cut, in order to manage and minimise the risks and financial outlay. It is prudent for tenants to obtain advice on dilapidations and ensure a plan is in place (as a rule of thumb) 12-18 months before a lease comes to an end. Running down the clock and leaving things to chance will often lead to an increased liability and financial outlay. ‘Failing to plan is planning to fail’ can be particularly true with dilapidations.

  1. Our premises’ IT connectivity is an increasing issue and will determine whether we relocate when our lease comes to an end. What can we do? 

This can be a major problem as businesses’ IT needs and demands evolve and increase. Again, the alterations covenant in the lease and the landlord’s obligation to permit the installation and to be “reasonable” is likely to be key. Third party consents will often be required in relation to the ownership of any other land that is implicated and falls outside the landlord and the business tenant’s property. If the works improve the landlord’s asset value and future ability to let the property, there should be a way forward in order to avoid having to relocate.

  1. Our lease is due to expire shortly. We may want to stay and are happy to pay an increased market rent, but are concerned by the service charge. How can we protect our business? 

Service charges are a frequent issue for business tenants and very much something to be aware of. Sometimes when the lease is agreed and signed up it is possible to negotiate a service charge cap, reducing the risk and increasing certainty. Where a lease provides that the service charge is only payable when certified, it will be important for tenants to ensure that the landlord’s certification is not final and conclusive and that the service charge claimed can still be challenged.

  1. We would prefer to pay a rent which is geared to our top line revenue. If we renew our lease can we achieve this? 

Ultimately the way in which rent is calculated and the basis on which it is payable is a matter of negotiation. Unless the existing lease contains what are known as turnover rent provisions, business tenants are not entitled to insist that any new lease contains a new turnover basis for calculating the amount of rent payable, as the law currently stands. Where they are agreed, turnover rents will always require very careful and detailed drafting, otherwise disputes are likely to arise.

For more information, please contact Warren Reid or another member of our Property Litigation team.

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