Coronavirus & potential traps when looking to offload redundant business space

In last week’s article Tim Blackman and Nick Carter discussed the sorts of advice that businesses have been requesting since the start of the lockdown. This started with questions about the best way of adjusting lease payments to support tenants at this time and more recently about whether leases can be terminated early or if they can reduce the amount of space.

As many businesses have made huge adjustments to their internal processes to enable working from home many tell us that they are surprised at how well it is working and how productive this can be. Naturally this has led to questions about how much office space is actually needed in the future. With the added draw of the considerable savings that downsizing would bring, along with other lifestyle and wellbeing benefits, many may decide that a full-time office-based desk isn’t as important as we all once thought.

We therefore expect to see changes in this sector as companies look to move into smaller premises or look to offload space (and reduce costs) by way of subletting or assignment. We also expect to see businesses making design/lay-out alterations to facilitate what we now call ‘the new normal’.

Avoid the traps  - key issues to look out for when submitting and dealing with applications for consent under a lease?

The key principles are not only set out in the terms of leases themselves, but are governed by a strict statutory regime - the main purpose being to protect tenants and facilitate the marketability of properties.

To get this wrong can lead to delays in getting rid of unwanted space and if that delay leads to a potential tenant walking away can lead to claims for damages for “unreasonably withholding consent”.

The majority of commercial leases provide that a landlord cannot “unreasonably withhold or delay consent” to applications to assign or sublet a lease or to carry out alterations. The statutory regime dictates how the landlord should respond to applications.

Key Issues for Tenants:

• Tenants should make a formal written application for consent as early as possible. Delays can happen where the tenant doesn’t make it clear that a request is a “formal“ one under the lease.   A lease will usually state how such notices should be served, usually at the landlord’s registered office or address as stated in the lease. Informal emails or discussion with landlords or managing agents will not start the clock running for the purposes of the statutory regime.
• The application should contain all necessary information that the landlord will need to consider.  This will include the full legal identity of the proposed new tenant and sufficient financial information to enable the landlord to determine if they will be able to pay the rent and perform the covenants.  Typically, landlords ask for copies of the last three sets of audited accounts and sometimes references.  Where the proposed new tenant is a new company without a trading history they may require a guarantor or rent deposit so some early consideration to this is helpful.
• Tenants should note that they will need to cover the Landlord’s professional legal and surveyor’s costs, as well as their own, in respect of the application. Tenants should therefore expect their solicitor to ask for funds on account as they will be asked to give a legal undertaking at the outset to pay the landlord for their legal and surveyor’s costs at the outset. 

Key Issues for Landlords:

• Landlords should acknowledge receipt of applications and deal with them promptly to avoid potential damages claims should their delay cause the deal to fall apart. 
• A landlord must firstly respond confirming what further information it needs to enable it to consider the application. This needs to be done carefully as it cannot later demand additional information.
• The Courts have said that a “reasonable time” doesn’t start until the landlord holds all necessary information to review the application. The general rule of thumb is one month from receipt of the application to completion of the licence granting consent, unless the landlord reasonably refuses consent. 
• Landlords must then respond within a reasonable time and if consent is refused it must provide reasons in writing.  Oral reasons are insufficient.
• Statute only allows for a single response from the landlord. The first response ends the “reasonable” period of time allowed so important to get it right!
• If the landlord refuses consent giving reasons in writing but some of them are unreasonable, it can still justify its refusal on the basis of those that are reasonable.
• Solicitors for all parties should be instructed promptly to prepare the Licence for Alterations/Licence to Assign/Sublet and associated documentation. 

Both landlords and tenants would be well advised to seek professional advice early in the process.