04 November 2010

Millstone or hidden gem: profiting from your premises

In current market conditions, cost-saving is high on the agenda for many businesses. Headcount and supply contracts are obvious initial areas for review, but there may be ways of reducing lease costs or realising value from a lease.

Even if you have a long-term lease, there could be avenues to explore with a view to being able to discuss more favourable commercial terms with your landlord. We are happy to offer, at no cost, an initial review and analysis of your lease commitments and to report back to you on any opportunities you might want to consider looking at in more detail.

The following are some of the possibilities you may wish to consider:

Lease termination

Don’t take any risks when you exercise your option to ‘break’ your lease.

You may benefit from the flexibility of a tenant’s ‘break’ option in your lease. However, a right to ‘break’ is often subject to strict conditions involving theservice of a formal notice to break, delivering vacant possession of the property and making certain time-critical payments.

You should bear in mind that your landlord can often rely on a technical breach of such conditions to frustrate your right to break, leaving you ‘on the hook’ for years of rent, service charge, business rates and other sums.

We can help ensure that you exit from your lease as smoothly as possible.

Sell your right to ‘break’ your lease

You may be in a position to sell to the landlord a future right to break your lease.

You may have a significant commercial bargaining position of which you were unaware. For example, you may have a right to break in the next year or two that you have no intention of exercising. If so, you can generally ‘sell’ this right back to your landlord for a capital sum, for a rent free period or for a period of reduced rent.

If an agreement is reached, the lease can be varied to remove the right to break and to provide for the fi nancial benefit that is to flow to you.

Renegotiating your lease terms

There is likely to be an immediate financial benefit to you in extending the term of your lease if:

  • your lease is due to expire at any time during the next
    five or so years and
  • you intend to stay in the same premises long-term and
  • your financial position is strong

you should be able to negotiate a capital sum or a rent free period or a reduced rent period by signing up to a longer lease term.

The benefit to the landlord is clear: he has a long-term tenant with financial strength which will enhance the value of the property, and enhance the landlord’s position with his own lenders.

Surrender and regrant

Your landlord may be willing to offer you alternative premises more suited to your future needs.

If you need to ‘right-size’ your premises, you may be able to negotiate a move from your current premises to alternative premises owned by your landlord. This is likely to be the case where the landlord is confident of quickly reletting your
current premises. Your landlord may be keen to retain you as a long-term tenant and thus be willing to be flexible in seeking to meet your business needs.

Subletting to a third party

This is an obvious source of income from your premises. However you should be aware of the issues relating to subleasing the premises to another occupant.

Subletting surplus premises is clearly an attractive option as you will benefit from rental income and reduce your liability to business rates. You should be aware, however, that you will remain liable for performing your lease covenants in relation to the underlet premises including the repairing obligations. You will want to ensure that there is nothing in the underlease which is inconsistent with the terms of your own lease. For example, you will need to be sure that you can obtain vacant possession from your undertenant in good time before you exercise a right to break your lease so as to ensure that you can give vacant possession (which is invariably one of the conditions subject to which your right to break can be exercised). You may also need the landlord’s consent to any arrangement with a third party, and – in the US – you may have to share some or all of the rent received.

There are other considerations to take into account such as whether or not to ‘opt to tax’ in relation to VAT. If you are to have a prospect of fully recovering VAT, you will certainly need to opt. The timing of such an option can be critical,
particularly where you are subject to the ‘Capital Goods Scheme’.

Rent review

Should you be reviewing ‘open’ rent reviews?

It frequently takes many months – or even years – for rent reviews to be settled. You may have a ‘historic’ review which remains to be formally agreed. If so, in view of the dramatic fall in rental values over the last 12 months or so, it may be worth revisiting the negotiations to ensure that full account has been taken of post-review date comparable evidence.

Exercising statutory rights of renewal

What are the best tactics in the current market?

If you are in the last 12 months of your tenancy, is there any tactical advantage to be gained by serving a notice to bring the tenancy to an end? This will depend on whether you want to stay or leave the premises. If you are willing to leave, the longest period of notice may result in a higher rate compensation payment at the end of the lease. If you want to stay, an early notice could defeat a landlord’s claim to take the premises back for his own use because he will not have been in ownership for a period of five years.

High service charge payments

Is there any scope for action alone or with other tenants to compel the landlord to economise?

There is evidence that some landlords are taking their service charge expenditure commitments seriously and are willing to discuss issues with tenants with a view to downgrading or reducing certain services. It is always worth discussing these issues with landlord but you will need to consider in
advance what charges might be capable of being reduced.

Where you have a short-term lease, you should be able to challenge long-term capital expenditure.

Walking away from your lease commitments

Is this a serious option?

Most landlords will take action to ensure compliance with contract terms, particularly payment obligations. The consequences of such action can be litigation, adverse costs, disqualification of company directors and loss of
reputation in the marketplace. It is unlikely to be a realistic option for a large business tenant, particularly one with a reputation in the marketplace to preserve. However, where leases are held by a tenant in separate holding entities, it is an option worth considering.

Freehold purchase

If you have a long lease, there could be signifi cant financial benefit in acquiring your freehold.

Many businesses occupy properties which were once houses and which may still have a residential element in the upper storeys. There are numerous such premises in Prime Central London and Manhattan, for instance. If your lease is
one which was originally granted for a term of over 21 years, you may well have a statutory right to acquire the freehold in the UK. If so, that gives you the opportunity to realise a half share of the ‘marriage value’ which arises when the freehold and leasehold interests come into common ownership. That sum can be very substantial indeed. Similarly, in the US, the landlord may be more than willing to part with the title to the property at an advantageous price, in order to meet other obligations, while the commercial real estate market remains impacted by the recession.

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