Lifecycle of renting business premises – Part 2 – Exiting premises
Business owners usually understand the need to seek legal advice and representation when entering into a lease of business premises but it is also important for those businesses to understand their rights and obligations at the end of the term of a lease and the options available to them to terminate those contractual obligations (if any) during the term.
In this series of articles our commercial property team looks at some of the ways to dispose of business premises before the end of the contractual term and associated liabilities..
Alienation
The right for a tenant to dispose of its lease is generally referred to as Alienation. This is the transfer of ownership of property rights and includes assignment, underletting, charging of an interest and parting with possession. Most leases contain restrictions on alienation. This may be an absolute prohibition or may be qualified by the requirement to obtain the landlord’s consent. If a tenant finds itself in a situation where it can no longer afford the rent for its commercial premises or conversely where it needs larger business premises it will need to review the terms of its lease to see what alienation rights it has. Moorcrofts’ commercial property team can review the lease for you and advise on your options.
Break Rights
The ability to assign or underlet will depend upon the rental property market. If you are unable to find a potential assignee or undertenant there may be other options available to you. All leases must be granted for a fixed term. Some commercial leases may however include a Tenant break right, being a right to bring the Lease to an end before expiry of the fixed term, on one or more specified dates upon service of a formal notice, giving a minimum specified notice period. Such rights will not necessarily be incorporated and it will have been a matter for commercial negotiation at the time that the Heads of Terms were agreed. This right is usually subject to conditions which have to be satisfied in order for the break to be effective and the exercise of a break right must be carried out strictly in accordance with the terms of the Lease. Business owners wanting to exercise a break right should seek the advice of a Solicitor well in advance of the date for service of the break notice to ensure that they are fully aware of the requirements and that all requirements are met within the necessary time frames.
Lease Renewal
It may be that your business is happy to remain in occupation until the end of the fixed term of the lease however towards the end of that term you will need to consider whether or not you want to remain in occupation or whether you might look for alternative premises. Unless the Lease is inside the security of tenure provisions of the Landlord and Tenant Act 1954 (which are statutory provisions which give a tenant of commercial premises a right to remain in occupation following expiry of the fixed term of the Lease and an automatic right to a new Lease from its Landlord, unless the Landlord can establish one of five set statutory grounds) you will have to vacate on or before the end date of the Lease. We are often asked whether any formal notice has to be served on the Landlord. Provided that the tenant vacates on or before the end of the contractual term, no notice is required however most tenants will want to notify their landlord in advance that they’re leaving. In some circumstances a tenant may have remained in occupation beyond expiry of the contractual term and it’s options in relation to obtaining a new lease will depend upon whether the lease is protected by the security of tenure provisions of the LTA1954 or not. Moorcrofts’ commercial property team can review your lease for you, whether or not we acted for you when it was entered into, and advise on the renewal options.
Dilapidations
Whether a commercial lease comes to an end at the end of the contractual term or earlier during the contractual term by way of the exercise of a break right or surrender, there will be obligations on the tenant as to how the property must be handed back to the landlord. These are usually contained in the “yield up” clause and are referrable to the tenant’s repair obligations, obligations to comply with statute and obligations in relation to alterations, amongst other matters. The requirement to hand the property back in the condition that the tenant was required to keep it under the terms of the repair clause, may or may not be limited by reference to a schedule of condition but usually implies an obligation to hand it back in good and substantial repair and condition having removed all alterations and made good any damage. In practice, unless a tenant is able to cease occupying the property two or three months before the end of the term, in order to carry out the works need to remove any alterations and repair/redecorate, it is usual for the parties to negotiate a financial settlement to compensate the Landlord for any costs it will have to incur to put the property in the condition it should have been left in and to remove any alterations that should have been removed. This is a matter for negotiation between the parties and or the parties surveyors but you should seek the advice of a solicitor as to the terms of such obligations as detailed in the Lease. Here at Moorcrofts we have established contacts with trusted building surveyors in the local area and across the country to whom we can refer you, should assistance be required. If a financial settlement is agreed, we can also negotiate the document recording that agreement for you.
Contact us
Our team of commercial property lawyers has extensive experience in reviewing leases and advising tenants on their rights and in assignment, underletting and surrender negotiation, combining our legal knowledge with commercial pragmatism to get the right deal for you. For an initial consultation, please get in touch with our Commercial Property Team.