TALKING SHOP
How to Get Out of Your Lease… Philippa Aldrich
which they are most probably tied for a number of years. That said, there are options available for businesses which need to dispose of their lease or renegotiate its terms. These options may not provide a quick fix but the commercial reality of the current market has left both landlords and tenants feeling insecure. Firstly, tenants should check to see if they have the right to assign or
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sublet the whole or part of the lease. Often assignment or subletting is permitted with the consent of the landlord. By assigning the lease, the existing tenant would be released from their obligations in relation to the property, but they may be required to comply with certain pre-conditions. Subletting, although not disposing of the lease, may at least allow the tenant to recover some costs. Many commercial leases allow the tenant to break the lease at a specified time during the term, or on certain specified events. This can be used as an exit route for struggling businesses. It is, however, essential that break options are exercised in accordance with their terms. Any pre-conditions must be strictly observed. It is common for break options to require at least 6 months notice, and therefore early consideration of the possibility of exercising this right is essential. If the date by which the notice must be given passes, the right to break will be lost and the tenant must bear the cost of the lease at least until the next break opportunity. Options to break can also be used by tenants as a tool for renegotiation.
If discussions start early enough, the threat of losing the tenant through the exercise of a break clause and being faced with an empty building may encourage landlords to renegotiate the lease onto terms more favourable for the tenant. If the tenants’ problems are cash-flow related, the landlord may be willing to reduce the rent or alter the terms for payment, such as allowing payment of monthly rather than quarterly rents in advance. At a rent review or break option, tenants may find themselves in a strong
position for renegotiation. It is certainly not in the landlord’s interest to see their tenant go under and they may even be willing to agree payment plans for any rent which is in arrears to ease the pressure during the tough times. Alternatively landlords may be willing to share the risk of the market turbulence and renegotiate the rent to a percentage of the tenant’s turnover. Despite the current weak market, in some circumstances it may be
possible for tenants to negotiate a surrender of their lease. If the landlord agrees, the tenant is released from any future liability under the lease. It is important to note, however, that any breaches which occurred before the surrender remain enforceable by the landlord. Tenants should therefore ensure that they seek a release from all breaches. But if a business goes bust can the tenant simply hand back the keys? If a tenant gives up possession of their premises and hands back their
keys to the landlord they may be able to prove that the landlord has agreed this as surrender of the lease. Whilst surrender requires the agreement of both parties, if the landlord acts in a way to suggest agreement, such as re-letting the premises, the tenant will be released from their future liabilities under the lease. But landlords are unlikely this, in which case, the continuing liability of an insolvent tenant under their lease will depend on the nature of the insolvency.
18 • FOOTWEAR TODAY • NOVEMBER/DECEMBER 2010
he cost of occupying a commercial building is usually the main overhead for businesses and increasingly, existing commercial leases are proving just too expensive. But how can a tenant get out of its lease? Tenants must face the fact that a lease is a legal document into
Tenants hoping to rescue their business may enter into a company
voluntary arrangement (CVA), a contractual arrangement with creditors. In this way tenants may avoid liquidation through the use of cost-effective arrangements with creditors (including landlords) regarding the payment of rents and debts. However, a CVA must be approved by 75% in value of creditors and the procedure for implementing a CVA is cumbersome. The CVA will set out a plan for the payment of any arrears, future rents and dilapidations liability in relation to the tenant’s leasehold property. The landlord’s ability to take legal action to recover any rents or the property will depend on the terms of the CVA. Small tenant companies can also file for a moratorium which will prevent the landlord from taking any legal action without the court’s permission. If the tenant company goes into liquidation, the landlord can seek arrears
of rent up to the date of commencement of liquidation. Claims for rent due after commencement can only be made with court approval but it is likely in any event that the liquidator will use his powers to ‘disclaim’ the lease. A disclaimer will have the effect of extinguishing any rights, interests or liabilities of the tenant. Landlords will have to look to previous tenants or guarantors who will remain liable for any past and future breaches of covenant. However, the landlord will not be able to pursue any party if it takes back possession of the premises. Administrations have become very popular since the Enterprise Act 2002
introduced a simplified out-of-court procedure. At commencement of Administration a statutory moratorium is placed on all proceedings against the tenant company during the period of administration. Also, the landlord will be prevented from bringing any action to recover rent or the property without first obtaining the consent of the administrator or the court. Landlords are now being forced to accept that when a tenant defaults on their legal obligations, the best option may just be to open talks. Once a tenant goes bust, the landlord’s remedies are limited. So for tenants and landlords alike, the idea of opening an early dialogue in pursuit of an amicable resolution is perhaps the only viable solution if they want to avoid becoming another statistic of the credit crunch.
Philippa Aldrich Philippa Aldrich was a partner in the Real Estate Group of Shadbolt LLP.
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