Reducing Commercial Property Commitments – COVID-19

One of the many implications of COVID-19 for businesses will be a review of their occupational requirements.  The combination of rent, service charge, business rates, utilities and other occupational costs often makes a business tenant’s property costs, second only to its staff costs.  There will be an increased impetus to cut these costs.  Whilst in the short-term, tenants may be looking for concessions on their rent and taking advantage of any available reliefs in relation to rates payments, a longer term view needs to be taken as to what physical space is required to serve the best interests of the business.  

Undoubtedly, the trends we have seen over recent years of hot desking, home working and paperless or paper light systems will gain further traction, particularly for office occupiers, but there may also be some push back to an over intensive use of open plan space, given its potential health implications.

If it is considered that space should be rationalised then it will be necessary for a business to review its legal position and options in relation to its property.  Given that most businesses will occupy under leases, I will focus on some key issues that relate to these.

 Expiry of contractual term

The optimum position will be if the contractual term of your lease is due to expire in the short-term.  This gives you a relatively straightforward opportunity to exit.  You do, however, need to be mindful of whether or not your tenancy is protected by the security of tenure provisions of the Landlord and Tenant Act 1954 (“the 1954 Act”).  If the 1954 Act does apply (which, in summary, it will do if you are in business occupation of the property and the lease was not contracted out of the provisions of the 1954 Act at the outset), then your tenancy will continue beyond the contractual expiry date if you remain in business occupation. It could only then be brought to an end by serving a 3 month notice under the 1954 Act.  If the 1954 Act does not apply then the tenancy will come to an end automatically on the contractual expiry date.

 Break clauses

Your lease may contain a right for the tenant (or a mutual right) to bring the tenancy to an at an earlier date then the contractual expiry date.  Great care, however, has to be exercised in serving any notice that is required by the break clause and complying with any conditions.  A failure to strictly comply with these requirements and conditions is likely to result in the operation of the break clause being ineffective.  In the circumstances, it is highly recommended that you obtain legal assistance in both preparing and serving the break notice and advising you on compliance with any conditions.  Such conditions could, for example, be limited to ensuring that the rent is fully paid and delivering up vacant possession at the break date but they may be more extensive and require a greater degree of compliance with the lease obligations, for example in relation to repair.

 Assignment and sub-letting

If the contractual expiry of your lease is not imminent and you do not have a break option that can be exercised within an acceptable timeframe then you may consider seeking agreement with a third party to take some or all of the space off your hands.  This may be challenging but if you are successful in finding a potential assignee or subtenant, it is likely that your lease will, firstly, require you to obtain your landlord’s consent to the proposed transaction and, secondly, that it will impose conditions for the transaction.  It will be important that any application for consent is sufficiently comprehensive so that the landlord cannot legitimately delay its consideration of your application.  If a landlord does appear to be unreasonably delaying its decision on the application,  rejecting the application or imposing what you consider to be unacceptable conditions then should obtain advice on whether you can challenge the landlord’s position.

 Surrender

It is always open to a tenant to seek to agree an early termination of its lease (a surrender) with its landlord.  However, this is purely a matter of negotiation and you can expect that the landlord will be seeking payment of a premium to compensate it for any void period and any works it considers are necessary to put the property into repair. Your position may be stronger if, for example, you landlord has a development opportunity for the property.

 Dilapidations

If your lease does come to an end (whether as a result of the expiry of the contractual term or an earlier termination) then it is likely that you will have an obligation to hand back the property in repair, decorated and with any alterations reinstated.  If you fail to do so then the landlord will have a dilapidations (damages) claim against you which may include not only a claim for the costs of putting the property into the condition that you should have delivered it up in but also a claim for loss of rent for the period of planning and carrying out the works.  There may be a number of points that can be raised to defend or at least reduce such a claim and, particularly for the larger claims, you would be well advised to obtain professional advice (legal, building surveying and valuation).

Contact our Real Estate Dispute Resolution  team today

If you are a commercial landlord or tenant and would like to discuss any of the issues raised above please do not hesitate to contact our Real Estate Dispute Resolution Team on 01895 207835 or 01895 207295, or email us at propertydisputes@ibblaw.co.uk.