50 ways to leave your landlord
What connects Debenhams, Marks & Spencer, Arcadia Group and New Look? They are all united in having too much retail space. Their landlords brace themselves for the next round of retail Armageddon. Is that just how it is post the 2018 collapse on the High Street?
It will come as no surprise that we are seeing an upsurge in enquiries from tenants looking to exit long leases of underperforming stores and landlords looking to protect occupancy levels and portfolio values.
But where to start?
The perception is that retailers are targeting CVAs as a panacea - a tool allowing them to manage their estate. Landlords can find this unjust. Rent reductions are sought to subsidise a retail business in decline for any number of reasons unrelated to property costs. CVAs are, however, complex, hard-won and hardly the quick fix that the media portray. They have certainly unsettled landlords though and are not the correct tool for a viable tenant business simply looking to remove themselves from a small number of underperforming locations.
Answers therefore may lie elsewhere in a series of more subtle moves.
The real starting point is often to revisit the terms of the lease of the premises in question. From a strictly legal perspective, a lease can tell us a great deal about the mechanics of the landlord/tenant relationship. The four corners of the lease document need not however, represent the whole story. The well advised landlord or tenant will seek out lease terms that can provide advantage or leverage in a broader commercial discussion with their opposite number.
The retail and leisure sector has never been confronted by more challenges and complexities. Inevitably, therefore, there is no substitute for targeted and strategic professional advice and guidance. What follows, however, will hopefully provoke some thoughts/discussion:
An assignation sees a tenant escape a lease by transferring its whole interest/obligations to another party/new tenant. In many ways, this is a perfect outcome for a tenant who wishes to be free and clear of an underperforming unit. Crucially, however, they need to find a substitute tenant who will pass muster with their landlord. The landlord’s priority is to maintain a rental income stream and to avoid taking back costly responsibility for vacant space. For both parties, a managed exit can be preferred rather than a process driven by external forces.
A starting point where a tenant is looking to dispose of its interest is to consider the controls contained in the lease documentation. Understanding the extent of each party’s rights and restrictions is key. It is common for a landlord to have a broad discretion as to whether to approve an assignation (although absolute discretion is rare). More specifically, the landlord will need to act reasonably provided the proposed incoming tenant passes certain financial tests.
Each party should be aware of the key principles relating to the grant of consent which are:
- A landlord is not entitled to refuse consent on collateral grounds for example, withholding consent unless a cash payment is made.
- A landlord's decision should be upheld if a reasonable man would have reached the same conclusion in the circumstances.
- The landlord need only consider his own interests in deciding whether or not to give consent. However, if refusal of consent would result in a greater detriment to the tenant than a benefit to the landlord it may be deemed unreasonable.
- The only relevant reasons for refusal are those which influence the decision-maker when he made the decision. Subsequent considerations are irrelevant. An application for consent should not be submitted until it contains full and complete information (such as covenant information on the proposed incoming occupier). On the flip side, a landlord seeking to frustrate consent need not consider additional information provided by the tenant after the application is made.
- A landlord must give full and complete reasons when refusing consent because, if challenged, these reasons will be what the court considers.
While assignation is often the main battleground, the alternative of sub-letting should not be forgotten. In a well drafted lease, the financial tests for sub-tenants should be less onerous than those relating to a proposed assignee. As such, sub-letting becomes the tenant’s “Plan B”. Sub-letting is also often seen as a more acceptable outcome for a landlord who maintains a relationship with their original tenant.
Parties will also be familiar with the concept of a break option. These are often forgotten about or overlooked. As such, it is vital to be absolutely clear as to what break options exist, when they apply and the circumstances in which they can be exercised.
It is well documented that the exercise of a break option can be a complex process, littered with tripwires for the unaware. Accordingly, it is always best to seek legal advice to ensure that options are exercised properly - as the consequences of getting it wrong can be costly.
A renunciation is a mutual agreement to end a lease early. Why would the parties agree to this? There can be any number of good practical or commercial reasons, but we commonly find that where a new and more willing tenant waits in the wings then a landlord may wish to scrap the old lease terms and start over with a new lease. That could be to achieve a higher starting rent or to ensure that more modern lease terms are in place (useful if an investment sale is imminent). From a tenant’s perspective the outcome could be neutral when compared to assignation or perhaps better (if a premium no longer needs to be paid to an incoming tenant and dilapidations claims can be dispensed with).
28th October 2020
In this webinar we hear from Kyle Monk, Director of Insight at the British Retail Consortium.
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9th October 2020
This guidance note focuses on the new regulations for the hospitality sector in Scotland.