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