How can a tenant get out of a Commercial Lease?

Once you have entered into a lease of commercial premises, you are contractually bound to pay rent and outgoings, keep the premises in repair and comply with the other lease obligations until the end of the lease term. This is the case even if you move out and have no continuing use for the premises. So what can a tenant do in order to get out of the lease obligations?

The first thing is to consider the detailed terms of the lease, in particular any early break rights and those relating to assignment and subletting. Assuming no early break rights, the options available include:

- a negotiated surrender of the lease;
- assignment; or
- subletting.

A surrender is best if it can be achieved at manageable expense. The landlord may be happy to take the premises back to use himself or to relet but the tenant is still likely to have to pay a premium. Otherwise, the tenant needs to find someone else to take the premises over. The two main ways to do this are by assignment or by subletting.

Assignment

This is where a new tenant (the assignee) takes over the lease.

Typically, assignment requires landlord consent, not to be unreasonably withheld. The landlord is entitled to be satisfied that the assignee is suitable and able to pay the rent and may impose conditions to his consent. These may include a rent deposit being provided or personal guarantees (where the lease is assigned to a company).

Of most significance to the outgoing tenant, is the usual requirement of an Authorised Guarantee Agreement. This is a guarantee by the outgoing tenant to the landlord that the assignee will pay the rent and comply with the lease obligations. Although the assignee will be primarily liable to the landlord, the tenant will still have fall back liability until either the assignee has in turn assigned the lease to another new tenant or the lease term has ended.

Subletting (also known as Underletting)

Subletting is where a tenant grants a new, subsidiary lease to another tenant (sub-tenant). The original (head) lease remains in force and the tenant will have the same liability to pay rent and carry out repairs, etc but will in turn collect rent from the subtenant and (depending on the terms) be able, in effect, to pass on the other lease obligations.

Subletting is sometimes prohibited outright, even if assignment is not and will nearly always be subject again to landlord consent (not to be unreasonably withheld). Again, the landlord will have various requirements, particularly in relation to the sublease terms, which usually have to reflect the existing lease, and the landlord will expect its legal costs to be paid.

The Consumer Rights Bill

The Consumer Rights Bill, which is expected to receive Royal Assent early on in the next Parliamentary session, will mark a significant change in consumer law.

The existing framework of consumer law is set out in over 100 separate pieces of legislation, placing a significant administrative and compliance burden on businesses and creating confusion and uncertainty for consumers. Consolidation of these rules should create a better compliance framework for businesses and make it far easier for consumers to understand and use their rights.

The existing framework is also considered to be out of date (e.g. in relation to digital content) and inconsistent (e.g. as between contracts for goods and contracts for services) and the Bill looks to modernise and streamline these areas.

The legislation proposed also strengthens consumer’s rights in some important areas. Provisions within the Bill which have the potential to make a significant difference to consumers include:

- consumers only having to accept one repair or replacement before being entitled to a refund;
- consumers being entitled to require a trader to reperform a service if the initial service was not carried out to a satisfactory level, or receive a partial refund if this is not done; and
- consumers having the right to receive a full refund when they return faulty goods within 30 days.

Lauren’s Conveyancing Exam Success

Lauren Simper took her CILEx Level 3 Conveyancing exam in May, and was awarded a merit.  This result together with her previous result from January gives her a Level 3 Certificate in Conveyancing.

She is now working towards her Level 3 Diploma in Law and Practice, which involves studying Criminal Law, Contract Law, Law of Tort and Employment Law.

Well done Lauren, and good luck for the next exam.

Matthew Dempsey's New Arrival

Everyone at Dixon Phillips would like to congratulate Matthew, Lisa and Henry on the arrival of baby Ruby, who was born on the 9th of May.

Congratulations!

Lawyer of the future

Lauren Simper joined us in an administrative role, but is now developing her skills towards a 　paralegal role.　 As part of this, Dixon Phillips is supporting her in working towards qualifications with the Chartered Institute of Legal Executives (CILEx).

Lauren has recently achieved a distinction in her Introduction to Law exam and a pass in Land Law.　 She has also received passes for written assignments about client care skills and legal research.

Congratulations to Lauren from everyone at Dixon Phillips!

Kelly Phillips

Beware of income-shifting dividend waivers - 28th April 2014

OWNER-managed businesses may need to review arrangements for shifting income from higher rate taxpaying shareholders to their lower rate taxpaying spouses if those arrangements involve dividend waivers in the wake of the recent decision of the Tax Chamber’s First-tier Tribunal.

The Tribunal held that dividend waivers made in favour of shareholders' wives were settlements and did not fall within the outright gifts to spouse exception.

Settlements legislation is intended to stop individuals (settlor) gaining a tax advantages by moving their income to another person who is liable to tax at a lower rate or is not liable to tax at all. Where this legislation applies to dividend waivers all of the income waived is treated as that of the settlor.

There is an exemption for outright gifts to spouses, but the exemption only applies if the gift carries the right to the whole of the income arising from the property and the property is not wholly or substantially a right to income.

A dividend waiver may therefore constitute income shifting, to which the settlements legislation can apply most typically to husband and wife companies where one spouse (a higher rate taxpayer) waives a dividend and the other spouse (not a higher rate taxpayer) receives a substantial dividend as a result.

Matthew Dempsey

Landlord and Tenant Update: Recovering Rent Arrears - 22nd April 2014

Until now, if a commercial tenant fell behind on rent a landlord could, without warning, instruct bailiffs to attend the leased premises and seize assets belonging to the tenant to sell to recover rent arrears (known as distress or distraint).

 

Commercial Rent Arrears Recovery (CRAR) replaces the common law right of distress and came into force on 6 April 2014.

A major change: If a landlord wants to use CRAR he must give the tenant at least 7 clear (complete) days advance written notice of his intention to exercise CRAR, giving details of the rent arrears and how and where payment can be made. The advance notice is supposed to allow the tenant opportunity to seek legal advice or pay the rent (rather than allow time to dispose of assets!!).

Other key points to note:

CRAR will only apply to the rent (and any interest and VAT) payable under the lease e.g. services charges, insurance, rates will not be recoverable through CRAR.

CRAR cannot be exercised to collect rent on residential or mixed use premises. 

A minimum of 7 days’ rent must be owed before CRAR can be exercised.  If a tenant pays part of the rent arrears, it could prevent the landlord from exercising CRAR.

If a tenant is likely deliberately to remove or dispose of goods during the notice period, a landlord can apply to Court for an order that a shorter notice period can be given (although this will impose a considerable administrative and cost burden on the landlord).

Enforcement action may be taken on any day, including a Sunday, and may take place at any time between 6am and 9pm or other normal trading hours of the business.

Only Enforcement Agents (similar to a certificated bailiff) instructed to act on behalf of the landlord can enforce CRAR.

Only the tenant’s goods may be taken. Goods which are necessary for the tenant’s personal use or in connection with the tenant’s employment, business, trade, profession or education are exempt up to an aggregate value of £1350.  

Whilst a tenant struggling with its rent will welcome these changes, they will frustrate landlords and may make the recovery of arrears a more time consuming and costly process. A landlord may be inclined to seek rent deposits on a more regular basis, which they can dip into in the event of tenant breach without undue administration. Negotiating and agreeing such key commercial terms at the outset and having well drafted lease documentation is essential. 

 Michelle Oliver

Speed awareness course - a quick appraisal - 25th March 2014

20 other mature students joined me at St Johns Innovation Centre to receive 4 hours of driver speed awareness training the other day.  All of us were there to avoid 3 points, having each driven past yellow boxes marginally above the speed limit.

Let me stress, right up front, I am NOT an apologist for speeding motorists!  I think dangerous speeding should be punished more severely than it is.   However, that doesn’t mean I have to agree with the yellow boxes or with the merits of courses for those caught by them.

The trainer, Peter was articulate, knowledgeable and entertaining, even if (only my opinion) a little patronising. “I’m not here to tell you what choices to make.  However, what do we need most, in order to be as safe as possible on the road?” “Space!” we all shout, after two hours of priming.  “..and what else?” “Time!” “.. and what does that mean we should be doing?” “Slowing down!”

I did learn quite a bit, including how ignorant most people are about the Highway Code.  I wasn’t alone in being wrong about national speed limits.   We were also told several interesting statistics.

1. What are the national (default) speed limits for cars on a) urban roads b) single carriageways c) dual             carriageways and d) motorways?
2. How many people were killed on the UK’s roads in 2012?
3. What percentage of these were a) in towns b) on rural roads and c) on motorways?

See the answers at the end.

None of the students wanted to be a class troublemaker and risk longer detention.  Accordingly, no-one tried to argue that driving above the speed limit might, on its own, not always be irresponsible and wrong; nor was there any challenge to the assertion, made by Peter, that yellow boxes are positioned in accident hot spots, primarily where there have been deaths.

I later checked the County Council accident map on this.  The camera that clocked me is on Victoria Avenue, where there have been no deaths or even serious injuries, only minor incidents.  It is positioned beyond the main cluster of the recorded incidents, partially obscured by a bus lane sign and on a wide, straight stretch of road with two lanes and good visibility each side.  An accident hot spot, or a lucrative one?

Spot the camera?

There is a 30 limit on Victoria Avenue but (as I learned on the course) if there happened to have been no street lights or repeater signs, it would be 60 (single carriageway, national limit).   I was clocked on a bright, clear day with no other vehicles, cycles or pedestrians anywhere near.   It is submitted, m’lud, that my speed of 37 was a safe one in the conditions.  I also suggest, m’lud, that the camera (£40k+ investment) was positioned at least in part for maximum revenue raising, not to promote safer driving.  OK, there is no legal excuse to exceed a speed limit but isn’t it wrong to target for enforcement (by cameras which exercise no discretion, regardless of the conditions) those places on the road where speeding is most likely to occur rather than where it is most dangerous?

The course was instructive but it was also too long and attended by the wrong people.  Most of my fellow students were women and nearly all the men were middle aged or older – not a boy racer in sight.  Peter was preaching largely to the converted.

The consequences of not being able to stop in time were starkly shown to us in several videos in which we saw the possible effects (hitting pedestrians as opposed to just avoiding them) of the longer stopping distance required by just a couple of miles an hour extra speed.  No-one disagreed with the overall message but I still thought there was no proper perspective on the real risks of not keeping scrupulously to a fixed speed limit along every stretch of road.

In short, for me, the course was a useful reminder of the dangers of speeding but I wasn’t alone in feeling resentful at having to be there.  It certainly didn’t change my view that those wretched cameras encourage people to perceive speeding not as dangerous or socially reprehensible but just as another thing on the road to look out for.  They undermine not only the moral case against speeding but also respect for the rule of law.

Answers
1. a) 30 b) 60 c) 70 d) 70
2. 1,754.  Lower than you might expect.  7 or 8 times lower than in earlier decades.
3. a) 21% b) 73% c) 6% - surprising eh!  Rural roads are relative death traps, partly because it takes longer for the medics to get to you.  Motorways are relatively very safe.

Paul Dixon

Bigger and Wackier - 4th March 2014

Cityscapes in Abu Dhabi and in Dubai up the coast are “must sees” of modern architecture.  Put them high on your bucket list, advises Paul, just back from visiting friends in Abu Dhabi.

Parts of the cities look like an architects’ playground, with buildings of every shape and colour, and all big!
Paul’s favourites in Abu Dhabi were the circular Aldar building  and the Grand Mosque.  This is truly enormous, with 82 domes, 12 ton chandeliers and the world’s biggest (50,000 sq ft) single carpet.  You wouldn’t want to lease it with a full reinstatement obligation at the end of the term.

Cruising along the main drag into Dubai in his friend’s open top Mustang, through a corridor of futuristic skyscapers, Paul felt like he was Catnis in the Hunger Games being ridden into the Capitol.  Dubai of course has the tallest building in the world - the Burj Khalifa.   Paul couldn’t get on a tour but reports that it is truly stunning from the outside and quite enough to admire without touching!

Whole new high rise business, leisure and residential communities are in development around Abu Dhabi and on its Islands, not to mention multi-billion pound palaces and huge infrastructure projects.   It’s a dynamic – and wacky – place.

…And finally, it’s a little known fact that people in Dubai don’t much like the Flintstones… but those in Abu Dhabi Do!

Networking Cambridge Style - 11th February 2014

We are lucky enough to be members of a professional networking group which gathers once a month to eat fine food and drink fine wines at one of the many magnificent dining rooms of the Colleges of the University of Cambridge.

The focus is very much on having an informal chat and a laugh and it is surprising how infrequently the conversation turns to work. This is despite the fact that the group is largely made up of lawyers, accountants, bankers and surveyors who, usually, can’t resist talking about their latest big deal or blue chip client win. In this relaxed environment, mercifully free of forced elevator pitches and referral slips, we have developed a number of valued professional relationships.

Last week the venue was the impressive Fellows Dining Room at Gonville and Caius. The room is designed in Ancient Greek style with details from the Temple of Apollo at Bassae including a large painted ceiling and gilded column capitals. The dinner was suitable sumptuous - spiced butternut squash soup with sour cream and croutons to start followed by marinated venison steak with chestnut mushrooms and a peppercorn and brandy sauce  then profiteroles with a hot rum and chocolate sauce to finish off. Superb!

The Dangers of Letting on a Handshake - 10th February 2014

My last blog, on tenancies at will and on the Landlord and Tenant Act 1954 (the “Act”), is relevant to the following two tips – one for landlords and one for tenants:

(1) Landlords of commercial premises are unwise to let tenants in on a handshake.

To do so will often result in the tenant acquiring unintended security of tenure rights under the  Act.
In outline, these  mean that a minimum 6 months notice to quit is required and that there are only limited grounds, involving payment of compensation, on which the landlord may refuse the grant thereafter of a new, written lease for a period of up to 15 years.   It is possible, therefore, for a landlord to let a tenant in just for a few months and then find he is stuck with him for much longer.

(2)  Conversely, tenants of commercial premises are taking a risk if they continue in occupation beyond the end of a lease but don’t get the landlord to grant a new one.

If the lease is protected by the Act, then there isn’t a problem for the tenant (other than an obligation to give a minimum of three months’ notice to stop rent continuing) but if the lease excluded the Act, the position is different.  To keep costs down, it is tempting for a tenant to rely on the landlord’s acquiescence or verbal agreement to him carrying on in occupation.   However,  the cases show that this is likely, in the absence of the Act applying, to be under an implied tenancy at will.   Even if the tenant is intending to stay on for a few weeks only,  he will be at the mercy of the landlord’s discretion on whether to allow the arrangement to continue longer than on a day to day basis.  He risks being given immediate notice to quit and becoming a trespasser at any time.

Paul Dixon

Easy Come Easy Go - Tenancies at Will (27th January 2014)

Clients recently signed a tenancy at will of new office premises, in order to get the keys on a temporary basis.   This was fine.   I then became involved in regularising the short term overlap period of occupation of their existing offices. This was initially proposed also to be by way of a tenancy at will.  I advised against signing.

The clients had been in occupation for a couple of years, on a handshake with their landlord.   He in turn was also a tenant, having been granted a lease by the freeholders but didn’t need the offices for himself.  The freeholders had just found out about my clients and were insisting on the occupation being clarified and properly documented. They were concerned about my clients changing their minds about leaving and claiming statutory security of tenure under the Landlord and Tenant Act 1954.  The freeholders’ property manager (their City of London solicitors keeping somewhat sneakily in the background) had presented my clients with the tenancy at will to sign.

The problem for my clients would have been that a tenancy at will legitimises ongoing occupation only on a day to day basis, so is very precarious.  Either party can end it on immediate notice.  My clients probably did have statutory security of tenure under the handshake arrangement, as it applies by default to any tenancy (written or implied) of premises occupied for business purposes.  They shouldn’t have been giving this up lightly, just to accommodate the freeholder’s concern, however difficult this may have been to their own landlord.  

All parties eventually agreed to a new underlease, outside the Act, for a one year period with mutual, rolling 4 week break rights.  This was more cumbersome than a tenancy at will but the only way to satisfy everyone.  
A tenancy at will is generally appropriate only where it suits all parties for the arrangement to be on a day to day basis and where it doesn’t cause significant problems for any of them if the occupation is brought suddenly to an end.    

Paul Dixon

Michelle at the Straw Bear Festival (15th January 2014)

Steeped in history (and not just a pub crawl for the locals ;) ) the Straw Bear Festival takes place every January in the market town of Whittlesey, where I am from, to celebrate the old Fenland plough custom of parading straw bears around the town.   The Straw Bear (basically a man in a suit of straw), baby straw bears, plus a colourful procession of dancers, musicians and poets move around the town stopping to perform outside all of the public houses - and Whittlesey has many such establishments!!  The procession is followed throughout the day by thousands of onlookers, all enjoying the merriment... and refreshments. You have to see it to believe it!! 

Michelle Oliver

Small Business Rate Relief - (13th January 2014)

George Osborne’s Autumn Statement last month promised to alleviate the business rates burden on small businesses, mainly by preserving and extending Small Business Rate Relief (see https://www.gov.uk/apply-for-business-rate-relief/small-business-rate-relief).  The measures include the extension, for a further 12 months until 31 March 2015, of a 100% relief (double the usual 50%) for RVs up to £6,000 and taper relief to £12,000; and the introduction of a 12 month transition period during which relief will still be claimable even when a business acquires an additional property which would otherwise take it outside the relief.

There is extra help promised for retail businesses, including a 50 per cent business rates relief for 18 months - between 1 April 2014 and 31 March 2016 - for businesses that move into retail premises that have been empty for a year or more.   See the DCLG Business Rates Information Letter (9/2013) for further details of these and other measures, as well as a link to a consultation paper on reforms to the business rates appeal process.

Paul Dixon
Solicitor

Blue Smile (6th January 2014)

Paul Dixon, Matthew Dempsey and Lauren Simper were recently invited to visit a local school by Blue Smile - a Cambridgeshire children’s charity that provides counselling and therapy for pupils between the ages of 3 and 13.

Dixon Phillips has been a proud supporter of the Blue Smile Project since 2011. The Charity’s aim is to offer skilled therapy and mentoring to troubled children attending schools in Cambridge’s most deprived areas.

Blue Smile work intensively with individual children for much longer than other agencies can.  This enables them to build trusting relationships not only with the children but also (importantly) with parents, to help address the children’s longer term emotional and psychological challenges and avoid these continuing on into adulthood.  

Our visit enabled us also to see first-hand the positive impact that the Blue Smile team can have working with pupils both inside and outside the classroom.

We will be taking a more active role in our support of the Blue Smile Project in 2014 by assisting with their Better Reading Partner programme, reading to children and listening to them read.

To make a donation to the Blue Smile Project or to request further information on the Charity’s aims, please log on to www.bluesmileproject.org, email info@bluesmileproject.org or call 01223 314725.