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When the recession blows the roof off
Business tenants and corporate landlords can find common ground, says Simon Murphy, property management partner at leading law firm Taylor Vinters
has got to be rented somewhere and business is tough right
now. If you are struggling to make the rent, orders are
slipping and you’re not sure you are going to make your next
payroll, then it’s time to ask:
What kind of help can you get from your landlord?
Many retailers are facing the pinch, with Game the latest in a long line of high street chains to go into administration. Landlords can sometimes help to prevent their tenants descending into administration if they are prepared to accommodate some realistic requests from the tenant, so as to keep their investment values and occupancy levels up.
The landlord may be prepared to re-gear the lease, if rent levels have fallen. If done on the basis of an exchange of side letters (i.e. on a personal basis for the current tenant) so that there is no effect on rent review, then this is sometimes an easier pill to swallow for the landlord.
Landlords can be more flexible with tenants concerning improvement works. Where there is an internal only lease with a service charge, significant capital works can be delayed so that payments required of the tenant can be kept to a minimum.
Where underletting of part is prohibited by the lease, but the tenant does not require all of the space, landlords can be persuaded to be more flexible. This works provided that any underletting is excluded from the security of tenure provisions of the landlord and Tenant Act – so that the landlord doesn’t end up with an undesirable tenant at the end of the lease.
If you’re having trouble persuading your landlord to agree to re-gear, it may be appropriate to offer personal guarantees or a rent deposit if you can stretch to it, so that the landlord has some security in relation to the reduced rent. There is simply no point in the Landlord agreeing to a reduced rent from a tenant who does not have the ability to even pay the reduced rent.
The key to all negotiations, as one would expect, is reasonableness. Although landlords (but probably not landlords in Cambridge) are likely to be prepared to be flexible in order to keep their tenants, they are not likely to want to affect their investment value, unless there is some likelihood that the reduced rent will be paid, and that the tenant will remain solvent and will comply with the tenant’s covenants under the lease.
What can the landlord do to maintain asset values?
In order to maintain investment values, it’s clearly important to retain tenants, especially those that the market perceives to have good covenant strengths. However, as indicated, there is no point in retaining a tenant whose covenant is very weak.
If you suspect that your tenant is insolvent, or is likely to become insolvent in the next couple of years, it is important that you make sure that the property is as re-lettable as possible. While tenants are likely to want you to put off major capital works during the hard times, it’s essential that premises are not allowed to get into disrepair and become harder to re-let.
Make sure your leases contain the right to enter and carry out repairs, so that if the tenant is not complying with its repairing covenants, you can enter the property, undertake the work yourself, and charge the tenant the costs as a debt. If there is a strong likelihood that your tenant will become insolvent, it is important that you exercise this remedy as soon as possible, to give yourself the maximum chance of recovering the debt from the tenant.
If you do re-gear, and you are unsure whether your tenant will have the ability to pay even a lower rent, make sure that you get a substantial rent deposit, to cover default.
If your tenant does go into administration, make sure that if the administrator uses the premises for the purposes of the administration, and trades from the premises, they pay all of the passing rent due and owing. Even if the administrator vacates the premises, remember that while the tenant in administration is liable under the lease, the premises are nil-rated for business rates purposes. It is often better to obtain permission from the administrator to remarket the premises, and hold keys, without this amounting to a surrender and/or forfeiture of the lease, so that you are not liable for void business rates, on top of unpaid rent. The lease can then be surrendered with the consent of the administrator when and if a new tenant is found.
If your premises is too large for the current market, take advice straight away on the sort of tenants likely to take on the capacity, and if it looks like there are no suitable tenants for the property, get planning advice from the local planning authority so that a strategy for redevelopment can be put in place sooner rather than later.
Simon Murphy is a property management partner at Taylor Vinters. He manages a team of dedicated property management lawyers who advise on all aspects of commercial, residential and agricultural property management issues. Simon advises on a wide range of property issues from lease renewals, possession claims, service charge disputes and dilapidations claims, to advising on rights and liabilities affecting freehold land and adverse possession.
Founded in Cambridge, and now with offices in London and Singapore, Taylor Vinters employs more than 220 highly qualified staff to offer a broad range of legal services to private, commercial and not-for-profit clients.
Notes to Editors:
Taylor Vinters is a progressive law firm headquartered in Cambridge, with offices in London and Singapore. Employing over 220 highly qualified staff who help businesses, individuals and not-for-profit organisations, across the UK and internationally, with a broad range of legal services. Clients range from high net worth individuals and university spin-out companies through to national charities, small to medium sized enterprises, FTSE listed businesses and Fortune 500 multinationals. http://www.taylorvinters.com