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Sharing Space - The Future of Distribution Centre Occupation

27th September 2017

By Gemma James, Partner in the Commercial Property team

The Evolving Market

The consumer-led market place cannot be ignored and landlords and tenants must adapt to survive. In an age of ordering goods at will on the expectation of swift dispatch and delivery, suppliers need to be based in multiple locations, often in smaller spaces and for shorter periods, and find cost effective and flexible ways to meet market demand. Smaller businesses will only succeed by sharing their occupation and distribution resources, which requires creativity and foresight when committing to premises.

Uber Freight is growing fast in the US, with similar companies elsewhere in the world. The same model could succeed on our shores, where private truck drivers are matched with businesses requiring transportation to keep goods moving. These drivers will need to store their trucks somewhere, so they too could need to share sites with similar operators.

The Solutions

What are the main options for sharing space? If you don’t own a freehold property, you will need your landlord’s agreement before you can take any of these options, so if you are entering a new lease, plan ahead and try to build in some automatic ability to share occupation without the need to incur the time and cost in future of applying for landlord’s consent. However, bear in mind that this tenant flexibility can count in favour of the landlord at any future rent review.

If you are an expanding business needing a new base on a small scale or temporary basis, try approaching existing site occupants to see if one of the options for sharing suit them. Consider the premises-sharing options below, but always seek guidance from your property agent and a solicitor before committing and ensure that your choice is properly documented.

Assign part of your Lease

This approach transfers the lease in respect of a specified area only to another party for the remainder of the term. It will probably require landlord’s consent, but may not be appealing to a landlord who would in future have to deal with at least one other tenant to collect rents payable and enforce the lease. It is useful for the tenant because it will no longer bear responsibility under the lease for the area being assigned, but the landlord would usually have required the outgoing tenant to give an authorised guarantee agreement for the incoming tenant, so any default by the new occupant could ultimately pass liability back to the assignor tenant.

Underlet part of your Lease

This allows the tenant to receive rent for areas which it no longer needs for all or just part of the remainder of the term. The underlease can pass responsibility for repairs and general lease obligations of the area in question to the undertenant, although there are usually limits placed on the terms of the underlease, such as that there must not be any rent free periods or other concessions and the tenant must enforce it at all times. The tenant remains liable to perform its obligations under its own headlease and pay the full rent to the head landlord at all times, and will need to ensure that the undertenant complies with its underlease to minimise complications when the underlease ends. If the undertenant has insufficient funds to cover dilapidations or is uncooperative in adhering to the underlease, the tenant could be left with the entire cost at headlease end.

Tenancy at Will

A tenancy at will can be a flexible solution, but it is usually only for a very short term temporary arrangement because it can be terminated literally by either party “at will” at any time. This means it is not a reliable guarantee of occupation or income from the premises. There is also a risk in that if the occupier stays for longer and the arrangement starts to look more like a lease, then it could be deemed to be a full lease. This poses the dual problem of putting the tenant in breach of its head lease by effectively granting an underlease without consent, and also the occupant could gain security of tenure under the Landlord & Tenant Act 1954 which could severely limit your options to gain possession in the future. Consequently, landlords can be reluctant to permit occupation under this arrangement.

Licence to Occupy

This can be a cost-effective space-sharing option, provided that the landlord permits it, because it can be for a specified term and is a more stable source of income, but it must be for a non-exclusive area. If the licensee could be seen as occupying its own exclusive area, it could claim that a real lease has effectively come into being. Again, this risks breaching the superior lease and the occupier could gain security of tenure, so a licence has to be carefully drafted and operated to ensure that others can access the area at all times and the position of the area being used can be re-designated at any time.

Group Sharing

If the tenant’s business is split into different sections run by separate companies within the same group of companies, then a lease will often permit them to share occupation of the property without further consent from the landlord provided that no landlord and tenant relationship (in particular the demanding and payment of rent) arises and the arrangement only lasts for as long as the companies remain in the same group.

There are plenty of options that could help your business to survive in the developing market. Try to think ahead when you take a new lease to automatically allow certain arrangements or at least limit the landlord’s ability to impose conditions on the granting of consent. Landlords want their tenants to thrive, but will naturally be concerned about the value of their investment property being diluted and the additional administrative work which can be connected with multi-occupied premises.

The contents of this update are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this update. © Mundays LLP 2017.

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