COVID-19 - seven tips for business tenants to reduce premises costs
[Read time: 4 minutes]
As a business tenant you may have more room for manoeuvre than you think. Now's the time to investigate your options.
1. Make a proposal to your landlord
Your business may be suffering in the pandemic, but many landlords are suffering too. Six months into the crisis, I have seen a number of deals being done that were unthinkable at the outset. Many landlords realise that it would be better to have a tenant who is paying at least something now, or who stands a prospect of paying in the future, rather than empty premises or an insolvent tenant.
It is difficult to know whether the Government's Code of Practice for commercial property relationships during the COVID-19 pandemic, published in June, has had much influence. It has been described as the "please play nicely, children" guidance. You could refer to it, but market forces are more likely to be the main driver of a deal.
Rent deferment is common, but stores up a problem for the future. Writing off arrears is happening in some cases. The reduction of rent levels is rare because of the knock-on effect it has on capital values, and the concern that it will be used as comparable evidence in rent reviews. However, a market adjustment seems inevitable in many sectors.
Beware that the restrictions on landlords' ability to take action have not interfered with tenants' contractual obligations to pay rent. Unless a deal is done, full legal liability for rent will continue.
2. Break clauses
You may be fortunate enough to have an option to break. Beware that break clauses can be tricky to operate. They are construed strictly; they are frequently conditional; and the pitfalls are not always obvious. There are many tenants who move out in anticipation of a break date, only to find that their break notices were invalid. They then find that they are still on the hook for rent, sometimes both for old and new premises: get a solicitor to serve your break notice.
If you have a break date coming up and you don't want to exercise it, there can be real value in offering to give it up in return for concessions from your landlord. It's definitely worth taking advice about that.
End of lease dilapidations frequently come back to bite tenants after they have vacated. Sometimes they inhibit the ability to operate a break clause.
Landlords' schedules of dilapidations naturally tend to state a landlord's case at its highest. They frequently incorporate substantial professional costs and claims for loss of rent. These may not be sustainable, and there are also statutory limitations which may apply under s.18 of the Landlord & Tenant Act 1927.
You may find that, with forward planning, you can carry out necessary repairs and decoration yourself at far less expense. Beware that there is no going back to do work after a lease has ended; it must all be done before then.
4. Service charges and insurance
The Government's Code of Practice emphasises that service charges and insurance premiums are usually an expense that landlords must bear in any event, and that there may be very little flexibility when it comes to passing the costs on to tenants. However, you should expect a landlord to make adjustments if services are reduced or not being provided because, for example, occupiers' staff are staying away.
Check your service charge demands and challenge them if necessary.
5. Rent reviews
Whilst upwards-only rent reviews are still the norm in modern leases, not all rent review provisions are the same. If you have a rent review coming up, it may be worth asking your solicitor to check it to see whether it provides any room for manoeuvre.
Despite the effects of the pandemic, rental demand in some sectors is holding up or even increasing. You may find that assigning, sub-letting, or even surrendering your tenancy is a possibility (see below).
6. Assignment and sub-letting
If you no longer need all or part of your premises, and your lease has some time to run, you could explore assigning or sub-letting. Get your solicitor to check the extent to which your freedom is regulated. Many leases impose limitations and require landlord's consent. Even if a landlord may not unreasonably refuse or delay consent, it may be conditional.
In a falling rental market, it may only be possible to attract a sub-tenant willing to take space at a lower rent than under the head-lease. The head-lease may prohibit this, or it may be a condition of landlord's consent that any sub-rent is no less than the head-rent. This may require tough negotiation. Beware of going ahead without landlord's consent; you may find yourself facing an injunction.
Getting your landlord to accept a surrender of the lease is usually an unlikely prospect, but it may be worth asking, perhaps as part of a wider deal encompassing arrears and dilapidations. On the other hand, if the premises are in demand, or there's development potential, the boot may be on the other foot. Get any deal documented and always take advice.