Leasing Commercial Property in Tough Times

Landlords and tenants alike need to carefully consider their positions in difficult economic times.

Barry Challender, commercial property partner at AB Corporate, offers some guidance for both landlords and tenants.

Please feel free to download our detailed guides referred to below from our website.

Anticipate risk of tenant failure

Landlords need to consider the benefits of personal guarantees and rent deposit deeds while at the same time remaining competitive in the market.  With existing tenants, landlords need to be clear what remedies are available when arrears arise and to act quickly.  Formal insolvency procedures such as administration can restrict a landlord’s remedies so it is better to act sooner rather than later.  A landlord might invite a tenant to negotiate a new position going forward in an attempt to keep that tenant, albeit on less advantageous terms.

Landlords’ remedies

The threat by a landlord of bringing a tenant’s lease to an end early (Forfeiture) is a powerful tool in a landlord’s armoury but it should be approached with extreme caution.  Taking control of and selling the tenant’s goods (Distraint) may also be an effective weapon for the landlord but new procedures are to be put in place in the future (currently expected April 2012) which could reduce the effectiveness of Distraint.  For more information on landlords’ remedies please see our Landlords’ Toolkit.

Tenants can negotiate

There is no getting away from it, commercial property is a tenant’s market at present which arises as a result of the poor economic outlook and the need of landlords to protect their investments.

It gives tenants an opportunity to have a commercial negotiation with their landlords about rent reductions either where the tenant is in financial difficulties or where a break clause may be looming.  Landlords are keen to retain existing tenants and, while each circumstance is different, our experience has shown that rental reductions can be agreed with even market leading landlords.

Don’t miss break opportunities

Tenants must be careful not to miss opportunities to bring their lease to an end early (breaking the lease) and need to understand what steps are required to exercise break rights.  Not all leases will contain a right to break and some may be subject to onerous conditions.  Legal advice should be sought.  As a first step please look at our guide to exercising break clauses.  To maximise the commercial opportunity a landlord needs to understand that a tenant is likely to and can afford to move.  Enter into negotiations well before the right to break arises.  Once the right is lost, it is gone and so is the tenant’s negotiating position.

Dilapidation costs

Tenants must not forget the costs of redecorating and/or repairing premises at the end of a lease (Dilapidations) in their financial planning.  Most tenants will have signed up to leases which require them to keep premises in “good and substantial” repair.  These innocent words actually impose a material obligation.  For a fuller understanding of a tenant’s potential exposure to Dilapidations please review our fact sheet on this.

Further Information

For further information on all commercial property related matters please contact me by calling 0844 824 8744 or by completing the form below.

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