News stories about well-known retailers forcing landlords to renegotiate commercial leases as part of a voluntary insolvency arrangement have encouraged some tenants to ask for a better deal. A lease is a formal contract and, unless a tenant is insolvent, the landlord has no obligation to agree to any changes but commercial reality may mean a landlord is willing to negotiate.
‘When trading conditions are tough, rent for premises can be a significant drain on a business,’ says Ian Cowan, commercial property solicitor with Richard Reed Solicitors in Sunderland. ‘Landlords may be willing to consider changing the terms of a lease, if the alternative is that a business tenant moves out. Changes need to be properly documented, so it is important to get your solicitor involved as early as possible.’
Although a landlord is not obliged to agree any changes to an existing lease, there may be sound business reasons for acting to support a struggling tenant. The landlord’s priorities are to maintain an income stream and make sure the property continues to grow in value. Attempting to recover arrears of rent can be expensive and if a tenant becomes insolvent there is no guarantee of success. If a tenant moves out, the landlord will have to pay empty property rates unless it can find a new occupier within a few months, and an empty property can quickly fall into disrepair or become a target for vandals and squatters. All of this means that if the tenant puts forward a reasonable proposal, the landlord may be willing to negotiate a change to the lease.
Typical changes to a lease include:
- moving to monthly rents, to ease the cash flow pressure that can arise when rent is paid quarterly in advance;
- reducing the rent or linking all or part of the rent to the tenant’s business turnover;
- softening repairing obligations;
- adding or removing break clauses; and
- reducing the size of the premises included in the lease.
Landlords may have their own reasons for wanting to change the terms of a lease, for example one might have plans to redevelop the property and so want to align the end date of the lease with the development timetable. This might mean adding a landlord’s right to break or agreeing that the tenant will stay for longer, possibly in return for a change in the rent.
Your solicitor will be able to give you crucial advice about the mechanics of any change to the terms of the lease. Important points to consider include:
- Is the change a temporary concession or will it be permanent?
- Is the change limited to the current tenant or will it also apply if the lease is transferred to another occupier?
- Will the change bind any future Landlord should the freehold be sold?
The answers to these questions, and the nature of the agreed changes, will dictate how the changes are documented. If the changes are to be permanent, the parties may enter into a deed of variation of the existing lease. If the tenant has a guarantor, the landlord must make sure they join in the deed of variation, otherwise the guarantee could be lost. If the changes involve extending the term of the lease or the extent of the premises, a variation will be treated as if the existing lease had been surrendered and granted on the new terms. This can have adverse consequences for the landlord, so your solicitor will suggest alternative ways to document the new arrangements.
If the changes are to be treated as temporary concessions or are personal to the current tenant, they will probably be set out in a personal side letter. Again, these can have unexpected legal consequences unless they are done correctly, so you must get a legal expert involved even if it seems like a very simple change.
If the change in terms is temporary, both parties will want to be clear about when and how the landlord can return to enforcing the original terms of the lease. This should be agreed and set out in the side letter. The landlord may want the right to end the concession by giving notice to the tenant but a tenant will want as much certainty as possible, perhaps by agreeing a minimum concession period. Other options include the concession ending if the tenant is late paying or breaches some other requirement of the lease. There are legal traps here for both parties, which is why expert advice is so important.
In a fast-changing property market, it pays for both landlords and tenants to be flexible. Expert legal advice early on and throughout the negotiations will help both parties achieve the commercial outcomes they want and avoid costly mistakes.
For further information, please contact Ian Cowan in our Commercial Property team on 0191 567 0465 or email: email@example.com