How to negotiate flexible lease terms
With the medium term economic outlook remaining unsettled and the EU Referendum in June causing some uncertainty, it is commercially unattractive for most tenants to enter into a medium or long term financial commitment under a lease.
In such unpredictable times, taking legal advice early on puts the tenant in the best possible position to negotiate flexibility which could well be in the interests of both parties. asb law's Chris Worthington shares his top five tips on how tenants can try to build in some flexibility in lease negotiations.
1. Break clauses
A tenant’s break clause can provide the opportunity to end a lease should trading conditions become too difficult. Tenants should however be aware that break clauses are only operable after an agreed period of the term has elapsed, and they should resist attempts by the landlord to impose conditions to the break or it may become inoperable.
A landlord’s break option should also be avoided as this gives control over the term and the business to the landlord. The potential for a shorter term may affect the marketability of the lease to a potential assignee or sub-lessee so this should also be carefully considered. Although, as accounting principles generally mean that businesses need to reflect the rolled-up outgoings under leases, there is a balance sheet advantage to a shorter term lease.
2. Rent-free periods
Landlord’s generally look to protect their headline rent levels and may be amenable to offering a rent free period rather than offering an overall lower rent. A surveyor can advise on the open market value of rentals in the area and what period of rent free could be requested in the local market.
3. Rent deposit vs. guarantors
A landlord may request a rent deposit to mitigate the risk of non-payment of rent in an uncertain market. Paying a rent deposit can seriously hamper a tenant’s cash flow at a potentially expensive time so an alternative would be to offer a form of guarantee instead. No guarantee should be signed without seeking legal advice.
4. Assignments / sub-letting
These provisions are crucial in providing the tenant with an opportunity to provide an additional income source should business conditions mean that it is required. Legal advice should be sought on the conditions attached to assignment and sub-letting and make sure they are easily fulfilled. Ensure that you fully understand any on-going legal obligations that are attached to either course of action.
Remember that the opportunity to negotiate maximum flexibility in these terms is at the outset. When the tenant needs to assign and finds the terms attached to landlord’s consent are onerous, it is too late.
5. Due diligence
Now is the time to undertake your searches and do your due diligence. It is crucial that the tenant is aware of anything that might affect their use of the property as soon as possible. This gives them the opportunity to assess whether any potential problems affect long term business plans or to negotiate a lower rent. Take advice early on to ensure that exposure is limited to any liability for such things as inherent defects, contamination or uninsured risks.
This article was published in the Travel Trade Gazette on 28 April 2016, written by Property Services Partner, Chris Worthington.
For more information on services for property occupiers or managing your property, please contact Chris Worthington, Partner, Property Services.
Published: 27 Apr 2016