Coronavirus & Commercial Leases | A tenants guide to reducing business space

Whilst the true impact of Coronavirus will not be seen for some time, our Property Group are continuing to receive instructions from those wanting to strategically re-organise and reduce their lease arrangements. Tim Blackman (Associate Solicitor) and Nick Carter (Partner & Head of Group) take us through the key options available for most commercial tenants…

As we look to emerge into a post-Coronavirus world, questions are legitimately being asked about whether the traditional office is actually still necessary, and if so, to what extent.

For many, home-working has been a huge success and is likely to continue, but spare a thought for our once bustling offices.

Right now, most of these are being converted into sterile, socially distanced spaces with partitioned queues for making your morning cuppa and a one way system dictating a scenic route to the nearest printer. The days of hot-desking appear to be over, at least for the time being, and some employers may even require staff to book future office visits in advance.

For many businesses this is going to leave offices operating with skeleton staff made up primarily of those who cannot effectively perform their duties at home. In the most extreme cases some businesses might be left requiring little more than a reception desk and meeting rooms. As a result, huge numbers of offices could become heavily under-utilised.

We have been busy offering advice to both landlords and tenants as to the best way of adjusting lease payments to support tenants at this time, including deferment of payments, rent holidays and other similar variations. There are various issues to consider when varying leases and a little advice can save much heartache later on.
We are receiving an increasing number of enquiries about whether leases can be terminated early or if the size of the space occupied can be reduced.

Can I end my lease early?

Leases do not usually contain “force majeure” clauses which allow termination of a contract due to unforeseen circumstances such as Covid-19 and even if they did there is doubt if this would suffice due to the temporary nature of the disease.

Therefore, it is not usually possible to end a commercial lease early unless there is a contractual right to do so, known as a “break clause”. We have seen a flurry of requests to serve break notices and urge caution if you are thinking of doing this without seeking advice as we see many examples of situations where break notices are held as invalid due to unforeseen traps.

Having a right to terminate early can also provide the necessary lever to open negotiations with a landlord to obtain better terms, such as a rent holiday or reduced lease payments for the remainder of the term. This is a subject all to itself so please feel free to call to discuss how that may work for you.

Is it possible to reduce the space we occupy?

This may be possible but is usually limited to certain standard processes which require you to put the property on the market via leasing agents. Unlike the more flexible serviced office or co-location models where it is easier to upsize or downsize in line with your business model, the average length of a traditional lease in 2019 was still 6.7 years for industrial space and just over 6 years for offices.

So what are the main options for those looking to dispose of excess space in order to reduce these costs?

1.     Assignment of part

A typical commercial lease will permit the assigning (i.e. transferring) of a lease with the prior consent of the landlord. Often the landlord will need to act reasonably in considering whether consent will be given and there are conditions which must be met, including a guarantee being given that the incoming tenant will perform the obligations under the lease.

The stumbling block is that it’s very rare for a typical lease to permit the assignment of only part. Usually an assignment must be of the whole property and it would be uncommon for a landlord to agree that a lease can effectively be split into two parts.

2.    Sub-letting of part

Most leases will similarly permit sub-letting with the prior consent of the landlord. Often the format of the sub-lease will need to be approved by the landlord and certain conditions will again need to be met.

The sub-letting of only part of a property is less common than the sub-letting of whole. Most occupational leases do restrict this, however, there can be are exceptions where properties are capable of being independently occupied by more than one tenant. For example, this might apply where an entire floor of a property is capable of being sub-let and proper access through communal parts or separate doors/staircases is available.

A careful review of the lease ought to be carried out in advance of any contact requesting consent from the landlord. Due consideration should also be given to:

(a) The contractual term of the lease and whether this is sufficiently long enough to be worthy of the administrative burden, management time and legal fees. 
(b) The practicalities involved such as any potential impact on car parking, access and whether any alterations to the property would be required to accommodate a sub-tenant. 
(c) Whether the property needs to be placed on the open market to find a sub-tenant and the likely timescales and costs involved. 
(d) The creditworthiness of any potential sub-tenant and their likely ability to comply with the sub-lease obligations.

3.    Surrender of part

A further option would be to surrender the lease and irrespective of whether this relates to the whole or just part, the consent of the landlord will be required. Crucially, there is no requirement on the landlord to provide this consent. It is a purely commercial negotiation with the tenant seeking to exit its obligations.

Understandably a landlord may only agree if a replacement tenant can be found to simultaneously take a new lease of the surrendered space.  We have recently documented such a deal for a business in Oxford and is a win win situation. If there is no obvious candidate then the property will need to be put on the market.

If no tenant can be found a landlord will usually require a premium to be paid representing the rent it otherwise would have received should the tenant have remained in occupation of the entire property for the contractual term. In a poor economic climate, such as now, a landlord is probably going to be concerned about finding another suitable tenant and so may refuse consent or increase its demands.

As always when giving back the property (even in part), advance consideration should be given to repairing covenants and yielding up provisions. The tenant should in particular be aware of its potential position with regards to dilapidations and factor those into its overall calculations. Whilst a surrender deed can compromise any such liability this might involve paying a higher premium in order to exit the lease.

Sharing occupation

Typically, a tenant will be permitted to share occupation of the whole of the property but this will usually be subject to conditions. Such conditions most frequently limit occupation sharing to only group companies and where no relationship of landlord/tenant can be created. So this option is unlikely to be helpful except in limited circumstances where the tenant is part of a wider group structure.