Stuck in the middle with you.

Katie Pentecost provided some useful tips or Landlords and Tenants on how to not get stuck in the middle when negotiating a Lease. See the article (pages 34-35) and much more in first edition of The South East Independent Spring issue

Need to avoid getting stuck in a lease? Are you a Landlord who is worried about new tenants’ ability to pay the full rent? Looking for flexibility or being forced to be flexible? New leases are likely to have less rigid letting arrangements.

The pandemic has brought with it uncertainty around the ongoing and future need for office space, as business owners have been forced to embrace homeworking and reconsider their need for commercial property.

In addition, the demand for retail property has been put in jeopardy, with around 11,000 outlets shutting in the first half of 2020; twice as many as in the same period in 2019.

An empty property is not good news for a landlord and concerns are high amongst tenants as they potentially find themselves tied into leases, with a number of years left until they are free to walk away.

When negotiating lease terms, consideration should be given as to how the pandemic affects the terms and obligations for both parties. Here are some of our suggestions for both commercial landlords and tenants, that may help provide comfort in these uncertain times:

Landlords:

  • Agree to a shorter lease. A long lease term may be too daunting for commercial tenants in the current climate. A shorter lease of perhaps 5 years may be more appealing, particularly to start-ups or to businesses that have had to restructure. A short-term lease and some rental income, is better than no lease at all.
  • Consider broadening the permitted use. This could allow the tenant the flexibility to set up an alternative business at the property or make the lease more favourable to potential assignees and undertenants.
  • Consider more flexible letting arrangements. This can be a way of tenants letting out their own premises to provide a much needed rental income, which can be passed onto the Landlord. Licences or fixed short-term underleases which are contracted out of the Landlord and Tenant Act 1954 (giving the undertenant no automatic right to renew its lease when it expires), could be an option.
  • Collect a rent deposit from the tenant at the start of the lease. Should the tenant not be able to pay their rent, the Landlord can use the deposit to cover that period of non-payment.
  • Consider requesting a suitable guarantor as additional security. This could be a guarantee from a parent company, or from an individual, to give the landlord some piece of mind.

Tenants:

  • Discuss the possibility of paying turnover rent, even if this only forms part of the total rent payable. Turnover rent is calculated by reference to the turnover generated at the premises and is most commonly used in the retail sector. The number of tenants opting to pay turnover rent is growing.
  • Discuss with your landlord whether it is possible to have a rent-free period or whether they will consider a rent concession to defer or reduce rent payments. This will most likely take the form of a letter, in order not to bind future tenants and to avoid it being taken into account at rent review.
  • Covid-19/pandemic clause. Consider requesting a clause which specifies that the tenant is not obliged to pay rent during periods where lockdown measures are in force. This can be expressed to also cover other pandemics.
  • Negotiate a break clause which allows the tenant to end the lease early, provided certain notice conditions are met. This can either be set for a particular date or be a “rolling break”, where no date is set and the tenant continues to have the ability to end the lease.

The contents of this article 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 article. © Mundays LLP

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