COVID-19 : is subletting an option for unwanted office space?
As yet there is no definitive roadmap as to when businesses will be inviting employees who work in offices, to return to work as they did before the Coronavirus pandemic. Due also to the economic hit many businesses are facing, most will be looking at their expenses to see where money can be saved.
After salaries, rent is often a business’s largest expense. Many have already made investments and adaptions to make working from home possible, and some may well be questioning whether they can save funds on office space which for has been empty for months. But what options does a commercial tenant have if they find themselves tied into a lease and paying rent for offices that are now larger than they need?
- Subletting commercial property
- Break clause
- Refurbishment for residential development
Subletting commercial property
If the lease does not prohibit subletting, then one option would be for the tenant to find a suitable business to occupy part of the property with them. In this arrangement, the original tenant’s rent commitment to the head landlord would remain, but the original tenant would receive rent from the subtenant and any service charge may be apportioned between the two tenants appropriately. Subletting therefore is a simple way for a tenant to reduce their rent expenditure without having to uproot their business.
The terms of the lease must be read thoroughly before a tenant decides to sublet, not only because this action itself may be prohibited by the lease, but if it’s permitted then it will in all likelihood require the landlord’s consent. Additionally, a tenant will want to be protected should their subtenant cause any damage or nuisance – after all, the original tenant’s repairing and maintenance obligation under the head lease will still apply to the whole property, whether they occupy it or not. Should a tenant wish to negotiate a sublease, legal advice is certainly recommended.
An alternative to subletting, it may be that a lease contains a break clause which enables the tenant to bring the lease to an end early. This will of course be the most straightforward way of terminating a lease, however it’s vital that the break clause is read carefully, and that any and all conditions are met, so as to give a tenant a right the break the lease. It is common for the lease itself to prescribe how a break notice can be served, and when it is then deemed received by the landlord.
It’s imperative that a tenant follows the terms of the lease exactly, because any variance can invalidate the tenant’s notice and they may lose the right to bring the lease to an end. Many break clauses are drafted in such a way that if a tenant is not 100% compliant with the terms of the lease, they lose the opportunity to break the lease for the remainder of the lease term, or for several years until the next break date. A tenant should strongly consider seeking the advice of a solicitor in advance of sending a break notice to their landlord.
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If a tenant has decided that their current office space is excessive, or no longer suits their needs, but their lease does not have a break date, or one soon enough, then assignment may be the best course of action. Assignment is the process whereby the existing lease is transferred to a new tenant.
Again, a tenant should read their lease carefully because assignment can be prohibited in a similar way to subletting, and even if assignment is permitted, it will likely require the landlord’s consent. Quite often, the assignment of a lease has attached to it various conditions on the basis that it’s often a higher risk to the landlord than subletting, because the landlord is letting a regular and consistently paying tenant go, and a relatively unknown third party take over the lease. A landlord will almost certainly want evidence of any new tenant’s financial worth and stability, as well as references from those currently doing business with the new tenant. Additionally, the landlord may want the outgoing tenant to enter into an ‘AGA’ – Authorised Guarantee Agreement. An AGA essentially keeps the outgoing tenant ‘on the hook’ for a period of time in the event that the new tenant defaults on the payment of rent in the future.
In most leases, an assignment will not be permitted unless the outgoing tenant enters into an AGA. It’s very important therefore for a tenant to read their lease thoroughly and seek legal advice if they are considering an assignment of their lease.
If a lease has no upcoming break date, and if subletting and assignment are prohibited under the terms of the lease, then a tenant has very few options should they want to vacate that property and escape their liabilities under the lease.
However, one remaining option in these circumstances is negotiating a surrender of the lease, that is, bringing the lease to an end early. In some situations, this can be the best commercial decision for landlord and tenant alike. If a lease has only 8 months left to run, for example, and if a new tenant has shown interest in taking a lease of the property, then a landlord would be more receptive to surrendering the lease and ‘locking in’ a new tenant for several years.
Because a tenant is seeking to escape their liabilities and obligations, there is usually a high degree of negotiation involved when it comes to surrendering a lease; more so if a third party is intending to take on a new lease once the existing lease is surrendered. A landlord may impose conditions on the tenant, such as more onerous repair and maintenance obligations or perhaps a ‘reverse premium’, that is, the tenant must pay a sum to the landlord in consideration of the surrender.
Here as Tees, we have experienced commercial property solicitors who can assist you in negotiating and formalising any subleases, assignments or surrenders, so as to maximise your business’ potential for a healthy future during these uncertain times.
Refurbishment for residential development
It’s still too early to know how much of an impact Covid-19 will have on the commercial property market, but just as tenants are reassessing their individual position in these changing times, landlords will undoubtedly want to protect their position too. This article has discussed options open to a tenant should they want to reduce their current office space usage, but these options are attractive to a landlord also. For instance, many landlords would sooner permit their tenant to sublet part of a property if that means the original tenant can afford to keep trading, rather than refuse permission to sublet and then risk their tenant becoming insolvent.
Similarly, agreeing to a tenant’s request to surrender a lease may provide the opportunity for a landlord to convert the property and refurbish it for residential or mixed use. The conversion of commercial property to residential use has been increasingly popular over the last decade and this trend may increase if the demand for commercial property declines as a result of the Coronavirus pandemic.
If you are a landlord looking into converting your commercial property to residential use, Tees’ experienced commercial property solicitors and conveyancing solicitors can assist you all the way from the initial review of your title, through to the sale of the residential properties.
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Chat to the Author, Aaron Cane
Executive Partner - Commercial property, Brentwood officeMeet Aaron
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Mark Arrowsmith [Gilcris LLP]
Over the past 5 years, Aaron Cane assisted us on the sale of a development site in east London. Aaron and his team worked tirelessly to ensure that the sale got over the line and his advice and support has been greatly appreciated. I couldn't have asked for a better solicitor.
Legal 500 UK 2021
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