The ongoing pandemic has really put remote working to the test and has had a significant impact on how we live and work.
For some, remote working has proven a huge success and so a work from home or hybrid policy has been implemented on a permanent basis. As a result, a lot of current workspaces, or, at least part of them, are now surplus to requirements.
In those circumstances, what options are available to commercial tenants to facilitate downsizing?
Assignment and subletting
Some commercial leases will allow for subletting and assigning either the whole (or possibly part) of the premises. With many other businesses likely to be in a similar position, perhaps looking to downsize or to promote more home working and flexible work patterns, it could be a good time for tenants to find others that are looking to share a space.
Usually with an assignment, a new tenant will take over the existing lease of the premises and the existing tenant will vacate. The landlord’s consent is, however, likely to be required first. A landlord will want to see evidence that the incoming tenant will be able to pay the rent and comply with its terms of the lease. The landlord may also insist on an authorised guarantee agreement (AGA) from the existing tenant, to guarantee that the new tenant will fulfil its obligations. This is likely to be asked for if the incoming tenant is unable to demonstrate a solid financial standing. In those circumstances, the outgoing tenant must remember that it will not escape liability from the lease, even after it has parted with possession of the property.
Subletting and sharing occupation with others is also permitted by some leases, but again, such arrangements are likely to be subject to landlord’s consent. The terms on which the property can be sublet will also usually be subject to certain conditions (such as the rent due under the headlease must be paid up to date at the time of subletting, that the rent under the sublease must be the current market rent or perhaps, at least the same rent that is already payable under the headlease). These conditions could impact on the ability to find a subtenant and should be considered at the outset.
Natural expiry of the lease term
If a lease is coming to its natural end, the tenant should consider as early as possible, what steps it may need to take in order to swiftly and economically exit from the property. It may need to consider how to deal with its reinstatement obligations (both in the lease and in any licences to alter), terminating any existing subleases and payment of any arrears. It is usually wise to start conversations with the landlord on those topics some months before the actual expiry date. If the lease is a protected tenancy, for the purposes of the Landlord and Tenant Act 1954, unless the tenant has ceased to occupy the property, it will need to bring the lease to an end in the usual statutory way by serving notice.
If the tenant has the benefit of a break clause, it should consider how and when it needs to exercise its right to break, well in advance of the break date. Tenants must remember that strict compliance with any conditions attached to the break is essential. If these conditions are not complied with the right to break could be irretrievably lost. Conditions can include ensuring all rent is paid up to the break date (which will often include the entire rent payment for the period in which the break date falls – not just payment up to and including the break date), delivering vacant possession and serving the break notice strictly in accordance with the notice provisions within the lease.
A break option may also give the tenant additional leverage to negotiate new terms with the landlord. For example, the tenant could suggest removing the break entirely, in return for a rent-free period, a reduced rent, or a surrender of part of its demise if it wants to downsize. This could be an attractive offer to a landlord that does not want to end up with an empty premises on its hand.
Although there is nothing in any of the COVID-19 related legislation that requires a landlord to accept an early surrender of the lease, a landlord may be open to such a suggestion if, perhaps, it has another use in mind for the property or it believes it can find an alternative tenant that is perhaps more reliable or might pay a higher rent. This is a valid consideration if the current tenant is struggling to keep up with payments.
The landlord may well ask for a premium for the early termination, to reflect the loss of rental income.
If a surrender is agreed, a tenant must make sure that this is well documented and it is clear that the tenant is released from all liability, including any rent arrears and dilapidations on completion of the surrender.
All of these options require careful consideration and any agreements reached must be properly documented. Tenants looking to exit or vary their existing lease agreements should always take the advice of a specialist commercial property solicitor first. To discuss this or any other commercial property requirements, please contact the Commercial Property Team on 020 8943 1441. For more information on our Commercial Property services please click here.