It is rare for organisations to stay in the premises they have occupied since their inception. Demands and needs change, and some grow and require more space within which to breathe, while others find that new technology equates to smaller premises and cost savings. However, some struggle and must cut their cloth accordingly.
Yet, regardless of the reason, moving presents problems and costs, especially in a healthcare setting.
Differing options
Jessica Booz, a partner, and commercial property solicitor at at Veale Wasbrough Vizards (VWV), says that a leaseholder has the options of assignment, subletting and the use of any break clauses that are available.
Alternatively, she says that, ‘it may be possible to talk with the landlord to negotiate a surrender of the whole or part of the property depending on the market at the time’.
However, as Nathan Hinks, an associate at Wright Hassall, explains, this is not an automatic right, as ‘a landlord may agree on an early surrender of a lease, but there is no obligation for them to do this’.
» For those moving to new premises, Booz offers a warning: ‘make sure that the negotiations on them are completed well in advance to avoid having to move items into storage if the new premises are not ready’. She provides a reminder that it is critically important to leave on or before the day of the vacation, as staying longer can also invalidate a break option «
It is interesting that not many realise that, as Booz highlights, in some leases, either a landlord or tenant can end a lease before the end of the contractual term via a break clause. As she says, ‘break clauses can be a valuable asset for a tenant wanting to end their obligations early’.
It should be noted at this point that break clauses can be fixed or rolling. In describing both, Hinks says that ‘a fixed break clause is usually exercised on a fixed date during the lease term. In comparison, rolling break clauses are exercisable at any time during the term, upon sufficient notice’. Tenants should understand which they may have and how they operate.
Making the break
Break options are often subject to conditions that must be complied with; if not, then a landlord can refuse to accept that the lease has come to an end.
As with anything legal, good advice is essential, says Booz. This is because ‘there are often long notice periods, sometimes 6 months or more, needed before a break option can be exercised; it is important that time periods are not missed’.
Hinks thinks the same, adding that not serving notice correctly is a serious risk, and so, his first point of reference is the lease, as it may prescribe a particular form of notice. Ideally, this would have been negotiated and agreed upon during the drafting of the lease, ‘so that the tenant is clear on its responsibilities in serving the notice and the landlord is required to act reasonably in accepting this’.
Additionally, there is case law for the enforcement of conditions: Lord Hoffman, in Mannai Investment Co Ltd versus Eagle Star Life Assurance Co Ltd (House of Lords, 1997), famously said that, ‘… if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on a pink paper …’.
A common condition that Booz draws attention to is how to give up occupation. Here, she says that ‘it is important that conditions are negotiated carefully; some conditions, such as a condition to provide ‘vacant possession’, can be difficult to comply with’.
Hinks explains more. He says that ‘the requirement for vacant possession is considered an onerous obligation. It is much more commonplace now to see reference to a property being returned ‘free of a tenant's occupation or continuing sub-leases’’.
Another requirement is for a tenant to be up to date with rent, and this, says Booz, ‘could also include interest on any historic late payments’. Worryingly, she says that a landlord does not have to confirm to a tenant whether they are up to date with rent etc; they could choose to wait until after the time for exercising the break has passed before claiming that a break was not validly exercised.
Furthermore, there is the matter of dilapidations, also known as repairing covenants, that cover premises conditions when handed back. Hinks explains that the end of the lease ‘usually acts as a trigger to review dilapidations issues since the tenant's obligations to reinstate and yield up the premises become relevant’. He advises that, once a break notice is served, it is likely that the landlord will begin preparing a schedule of dilapidations.
Another worry for Hicks is the concern that a landlord may still be able to pursue a dilapidation claim. In fact, he says that ‘landlords may find it easier to claim for dilapidations upon the termination of a lease because there are fewer statutory restrictions’.
Consider the impact of covenants—these too can prove to be problematic. Hinks has seen first-hand that tenants must follow all covenants and not be in material breach of repairing covenants. As a result, he recommends that ‘tenants ask their landlord to accept the break notice upon payment of an agreed amount to cover any outstanding breaches’. He also thinks it fair to ‘ask a landlord for confirmation of the steps the tenant needs to take to comply with any conditions, while also requesting a schedule of dilapidations in relation to any repair works’. Additionally, if there is disagreement over any outstanding sums due, he recommends paying ‘on a without prejudice basis and disputing the matter later’.
However, with the potential for so many terms that need to be met to exercise a break, tenants are advised to protect their position by keeping evidence of compliance, including how the notice was delivered.
Lastly, for those moving to new premises, Booz offers a warning: ‘make sure that the negotiations on them are completed well in advance to avoid having to move items into storage if the new premises are not ready’. She provides a reminder that it is critically important to leave on or before the day of the vacation, as staying longer can also invalidate a break option.
There is no break clause…
Break clauses are common, but they are not universal. They are also not that frequent. However, Booz says that those in this situation could see if the lease allows a tenant to assign the whole of the lease to another. Alternatively, they may be able to sublet part or the whole.
In terms of assignment or subletting, Hinks says that landlord consent may be required ‘which can be subject to certain conditions being met which are usually contained in the lease’.
Therefore, the advice to tenants is to check for conditions that need to be complied with before assigning or subletting. Booz gives an example: ‘a landlord will want to know that the new party occupying their premises is able to pay the rent and comply with the lease terms. This means you may have to provide accounts and/or references for the incoming tenant; the landlord may be allowed to demand a guarantor or rent deposit from the new tenant’.
Thankfully, she says that, in most cases, a landlord cannot unreasonably withhold or delay giving their consent. Instead, they must respond quickly and reasonably to any request to assign or sublet.
Nevertheless, Hinks adds that a landlord can refuse if there are any arrears of rent or any other sums under the lease, or ‘if it considers that the proposed tenant or undertenant is not of sufficient financial standing’.
With a note of caution, Booz warns tenants thinking of subletting that ‘they remain liable for compliance with the terms of the lease, including the payment of rent. Being no longer in occupation and so able to control compliance with the covenants under the lease could make this difficult’.
In comparison, under an assignment, the primary obligation to pay the rent and comply with other covenants such as repair moves to the new tenant. However, says Booz, ‘an outgoing tenant is often required to provide a guarantee to the landlord, which means that if the new tenant does not comply with the lease, the landlord may still yet pursue the original tenant’.
So, in Hinks' view, with serious potential for a liability to remain, this ‘may not always be a clean break and so may not be suitable if a tenant is looking for a ‘cut and run’’. He says that due diligence on those taking over an assigned or sublet lease is essential.
One last point from Booz: it makes sense to ensure that a sublease terminates a few days before the end of the main lease. As she puts it, ‘this ensures that the original will be able to give vacant possession to the landlord at the end of the lease to avoid the penalties that flow from not doing so’.
A negotiating tool
It is logical for tenants to consider an upcoming break clause as a way to negotiate a better deal. However, Booz says that landlords are aware of this tactic and comments that ‘it is vital that any negotiations are concluded before the time for exercising the break expires as any leverage the tenant may have had expires at that point’. She has seen landlords push negotiations out deliberately.
Additionally, of course, a tenant wanting to negotiate needs to consider whether they really are wanting to move. Again, Booz has seen landlords call a tenant's bluff. She says to remember that ‘once a break notice is served, it cannot be withdrawn unilaterally, and a tenant would then be in the unenviable position of having to negotiate a new lease with their landlord, potentially on worse terms than before’.
Summary
There are numerous ways of disposing of property. The common thread to all is that good legal advice is necessary for both those leaving and taking on premises; it is very easy to act in haste and repent at leisure.