19 Feb 2019

It looks like 2019 won't be the new start many had hoped for. With large high street retailers already teetering on the edge after a disappointing Christmas and the government still up in arms about the B word, the country's commercial real estate market is looking more and more uncertain.

The uncertainty is leading many tenants to rationalise their portfolios and consider alternative ways of carrying on business whether it be away from the high street and online or, due to the rise in agile working, whether a fixed office is even necessary. Therefore, it is vital for tenants to be aware of their options if they no longer require business premises. 

Break options

A break option is a contractual right to end a tenancy early. The majority of break options are conditional and any conditions must be strictly adhered to. If a tenant fails to comply with a condition, for example by not paying up all required rents (which may include any outstanding service charges, interest etc), the break option will not be effective and the tenant may have no choice but to abide by the lease for the rest of the term.

Surrender

A surrender is where the landlord and the tenant mutually agree the return of property to a landlord. Some landlords will not be willing to agree a surrender at all. Other landlords may not be willing to take the lease back without a premium being payable by the tenant, and the size of such a premium demanded by a landlord may make a surrender financially unviable for the tenant. 

Assignment

A tenant may be able to assign its lease to another tenant and therefore avoid immediate ongoing liability under the covenants in the lease . The landlord may require the outgoing tenant guarantee the incoming tenant's obligations under the lease but, whilst the incoming tenant complies with the lease obligations (including to pay rent), the outgoing tenant at least has no immediate liabilities. Unfortunately, if the incoming tenant ever defaults, the original tenant may well find itself liable again for the lease liabilities, even though it no longer occupies under the lease.

Section 27 Notices 

Where lease is protected under Landlord and Tenant Act 1954, a tenant may serve the landlord with at least three months' notice to terminate the lease either on its expiry date or any time afterwards. This prevents the lease continuing on after its expiry date under the terms of the 1954 Act.

A tenant can alternatively ensure a 1954 Act tenancy ends by ceasing to remain in business occupation at the end of the lease. However, it is often advisable to serve a section 27 Notice anyway out of an abundance of caution to avoid any argument that the tenancy continues.

CVA

A Company Voluntary Arrangement or CVA is an arrangement between a company and the majority of its creditors which agrees a settlement of the company's debts. A CVA involving a landlord usually results in significantly reduced rents imposed on the landlord and even the option to terminate the lease early. 

CVAs are becoming an increasingly common way for retail tenants to readjust their portfolios by giving them the right to terminate leases early. Mothercare, House of Fraser, New Look, Carpetright and Byron Burger are just a few of the companies who have used (or tried to use) CVAs in such a way.

Frustration

Frustration is an event which is so fundamental it goes to the root of a contract (eg. lease) and renders the performance of the contract impossible or so radically different from what the parties had contemplated. It is usually extremely difficult to argue a frustrating event should terminate a lease, however there is a case coming to trial shortly (Canary Wharf (BP4) T1 Ltd v European Medicines Agency) where a dispute has arisen as to whether Brexit will frustrate a lease. It could (though this is perhaps unlikely) lead to frustration becoming a viable option for tenants terminating their leases early if their position is radically different because of Brexit - we shall soon see!

Conclusion

There are a number of options open to tenants if they do want to try to get out of a lease and its obligations, but the best place to start is usually to obtain legal advice to fully advise on which option may be available and most appropriate in the circumstances.