Surplus to Requirements - tips for Tenants to consider if they wish to vacate their premises early

Surplus to Requirements - tips for Tenants to consider if they wish to vacate their premises early

With the busy Christmas trading period having passed the quieter months of January and February present an opportunity for many restaurateurs and tenants to consider their plans for the coming year.

Following a spate of press releases indicating tough trading conditions some restaurateurs may also be considering whether their existing portfolio of units needs to be refined. 

So, what do tenants need to consider if they have taken the decision to sell their lease and vacate their current premises?

Most leases will refer to two ways in which a tenant can vacate their premises: assignment and subletting.  A third option is surrendering the lease back to the landlord.

Assignment

This is where a tenant transfers their lease (sometimes for a premium) to a third party.

In order to transfer a lease the consent of the landlord is usually required.  Most leases will state that the landlord cannot unreasonably withhold consent. 

A tenant should obtain financial information and references for the proposed new tenant as the landlord will want to assess this and ensure that its security and the financial strength of its tenant is not weakened when the lease is sold.  A landlord may ask for various guarantees to cover this.

The main guarantee that a landlord is likely to request is an Authorised Guarantee Agreement (AGA).  An AGA is a guarantee given to the landlord by the outgoing tenant for the performance of the incoming tenant for the duration that it remains the tenant.

Rent deposits and director guarantees are the other common forms of guarantees.

Subletting

Subletting differs from selling as the tenant remains responsible for the rent and service charges to the landlord with the tenant passing down the costs to its subtenant.

Subletting may be useful for shorter term arrangements where a tenant feels that they may wish to take back the premises after a period of time.

Again, the consent of the landlord will be required which cannot be unreasonably withheld and the lease should be checked for any other requirements with which any sublease needs to comply. 

You should consider whether you would require a rent deposit or director guarantee for your subtenant.

Pre-Emption

Many landlords now include in their leases a right of pre-emption.  This gives the landlord a right to “buy back” the lease instead of letting the tenant sell/transfer it to a third party.

Tenants must check the terms of their lease to ascertain whether their landlord has this right.  If so, a tenant will be required to give the landlord time to buy-back the lease for the same premium that has been agreed with its buyer.

Surrender

If the landlord believes they can achieve a higher rent then they may be happy to take back the lease by way of a surrender and re-market it.

From a tenant’s perspective a surrender of the lease may be the best choice.  It means that they can walk away from the premises without any ongoing liability.  The landlord may require a payment to be made for agreeing to a surrender

Other points to consider are as follows:

Break Clause

Break clauses are not typically offered by landlords and would have been agreed at the outset of the lease.  A break may be exercisable at any time or on a specific date and this will be confirmed in the lease.

The conditions of any break clause must be strictly complied with otherwise the attempt to break the lease may be invalid.  Typically, breaks are conditional on a requirement that the annual rent (and sometimes all sums due under the lease) are paid up to date and that the tenant leaves the property empty.

Courts are unsympathetic to tenants who have not complied with break clauses strictly.  It is vital therefore that you instruct your lawyer through the process to draft and serve the break notice.  

Negotiations

Of course, you could always seek to negotiate a rent reduction or change in the rent payment periods.  Landlord may be prepared to agree this to assist, in the short term at least, so that its tenant can manage its finances

If you are a tenant and considering your options in relation to premises that you occupy please contact Ian Leigh (T: 020 7462 6962 E: il@cbglaw.co.uk) or Nicole Kalli (T: 020 7462 6960 E: nk@cbglaw.co.uk) to discuss further.