The two certainties in life are death and taxes and the High Street is no exception to this rule, as the spate of retailer fatalities this week has demonstrated. One of the major reasons for this is the high cost of renting property on the High Street and it is no coincidence that rent quarter days see a higher proportion of insolvencies.
Retailers really need to go through their lease documents with a fine-tooth comb!
Whilst a few years ago, retail tenants may have given scant thought to the finer wording of a lease in their haste to secure a prime location, the world has changed and such short term views cannot now be taken. So what should a tenant look at when negotiating a lease to its advantage?
It cannot be stated strongly enough that unless a favourable break clause can be negotiated, a short term is a favourable option to a tenant. If trading conditions change, the tenant can review its position and take a view on whether to renegotiate the rent on lease expiry or simply pull out of the premises. Without this flexibility, a tenant could find itself burdened with overheads on an unwanted property for many years, whilst having to pay business rates and be responsible for maintenance also. The increasing number of voids on the High Street and the abolition of empty business rates relief have put landlords under pressure to fill units, which a tenant can use to its advantage during negotiations.
This goes hand in hand with term, really. If a longer term is agreed, it is certainly worth inserting at least one break option, so that the lease can be terminated by the tenant if so desired. Often break clauses are worded so as to make them validly operated only if certain conditions are met by the tenant, these may range from payment of rent to the handing over of original deeds to the landlord. A break clause should ideally be unconditional: this will reduce the margin for error. Care should be taken when drafting and serving the break notice, as the lease will often set out rules governing the means of service, the deemed service provisions and the party to whom the break notice must be addressed. Even an unconditional break option therefore carries its pitfalls and it is worth taking expert advice prior to serving a notice, as the financial consequences of serving an invalid break notice far outweigh the cost of such advice.
Alienation and concessions
Leases often provide that a tenant may only part with possession of the whole of the premises, whether by assignment or subletting. In the current climate, many tenants find that they no longer need all of their space and could operate a more profitable operation if they could dispose of part of their demise. It is therefore useful to negotiate that ability into a lease, which can allow a retailer to sublet so as to bring in complimentary neighbour, paying rent and potentially attracting additional footfall, or to assign part of the demise to a non-competitor, significantly reducing overheads. The ability to allow concessions into stores is also desirable, as they can again be mutually beneficial.
The service charge provisions in a lease can add a significant sum to a tenant’s outgoings, so steps should be taken do minimise these if possible. It is useful to impose a service charge cap, limiting the amount that a landlord can charge in a given year. In the case of shopping centres, does the tenant have its own marketing campaign? If so, it should try to avoid contributing towards the any marketing costs that the landlord may incur in promoting the centre. Are certain tenants more likely to cause wear and tear than others? Again, factor this in. Ensure that the landlord justifies its expenditure.
Dilapidations are often a huge source of contention between a landlord and tenant. A good option is to insert into a lease a schedule of condition, documenting the state of the premises at the start of the lease and limiting the tenant to bringing it back up to that standard. Otherwise, a tenant may find its landlord seeking what is in essence an improvement of the premises, at the tenant’s expense. Tenants should also be wary of landlords serving an interim schedule of dilapidations, as in many cases, these can be challenged. It is always worth undertaking a survey prior to lease expiry and liaising with the landlord to ensure that any items of dilapidation are remedied before the premises is handed back, so as to minimise any claim.
Rent review provisions
Most leases provide that rent can go up on review, but not down. In recent years, that has put established tenants at a huge disadvantage as compared to new tenants coming into the market, as open market rents have gone down. When negotiating a lease, a tenant should try to ensure that the rent can be reviewed in either direction. Whilst on renewal a lease generally follows the existing lease, if a tenant can show that rent may go down as well as up, it may be able to challenge the upwards-only nature of the existing rent review clause.
Final thoughts: A lease is a huge investment…
A lease is a huge investment for a tenant – it pays to get it right. The list above is not exhaustive but should hopefully give tenants a steer in the right direction. If in doubt on any aspects of a lease, seek specialist advice. A solicitor will be able to assist and in certain circumstances a chartered surveyor should also be instructed. With the correct advice, a tenant can avoid being tied into an onerous lease and reduce the likelihood of it becoming the latest High Street casualty.
This blog was written by David Linklater is a property litigator at SA Law LLP in Hertfordshire who specialises in the retail sector. His expertise covers all aspects of commercial property litigation, acting for tenants, landlords, investors and developers. David advises on a whole range of commercial property scenarios, including business lease renewals and termination, dilapidations disputes, advice on forfeiture, the property insolvency regime and restructuring advice, rent reviews, advice concerning the acquisition of land and buildings and the rights pertaining thereto, actions against trespassers and telecommunications advice.
If you would like more information or advice relating to a specific matter, please do not hesitate to contact me on 01727 798097 or by email at email@example.com. Follow me on Twitter @SA_RetailGuru or connect with me on LinkedIn at http://www.linkedin.com/in/davidjlinklater .