TENANTS: Break, Assign or Underlet - Considering the options
AUGUST 2009
In the current economic climate, tenants may wish to explore the possibility of assigning their lease, underletting their premises or exercising the break option in their lease. It could be that a particular property is not performing well or downsizing has resulted in too much space. It is important for tenants to check their leases to ensure they do not miss any opportunities to exercise the break option and be fully aware of any requirements with regard to assigning or underletting the premises.
Break Options
A option to break, exercised strictly in accordance with the lease, will mean that the tenant can terminate the lease on a particular date with no future liability under the lease. Most tenants will be aware of the date on which the break option can be exercised. However, time is of the essence for the exercise of break options. If a notice is served one day late, it will not be effective. Also, many break options are conditional and the tenant must ensure that all the required conditions can be, and are, satisfied at or before the relevant time. In particular, tenants should be aware of the following:-
- Notice Period – tenants should ensure that notices are served in accordance with the requirements under the lease with regard to timing, format and method of service;
- Termination Sum – if a termination sum is required, the tenant should ensure this is paid in cleared funds, with VAT if required, and in the manner set out in the lease;
- Rents – many leases will include a requirement for the rents to be fully paid up at the break date. The tenant must be clear which rents must be paid (it may include insurance and service charge payments) and ensure the same are paid and up to date at the relevant time;
- Vacant Possession – leases will often require vacant possession to be given at the break date. This means that the tenant must give the property back to the landlord with all the tenant’s fixtures and fittings removed, all rubbish and items belonging to the tenant cleared and any subleases terminated. The wording must be carefully checked to ensure that a minor oversight does not result in this condition not being met;
- No breach of covenants – if this is a condition of the break clause, tenants should ensure it is dealt with as a priority. Any failure to comply (however minor) may mean the condition is not satisfied and the break clause cannot be exercised. The tenant may wish to consider agreeing with the landlord a schedule of dilapidations/works in plenty of time prior to the break date so as to ensure full compliance with this condition.
Assignments
Tenants should check their leases to see under what circumstances they can assign their lease. The vast majority will require the landlord’s consent (which should not be unreasonably withheld or delayed) and there may be circumstances set out in the lease in which the landlord can refuse consent. The lease may also contain conditions which the landlord may require to be satisfied before the assignment will proceed, eg. the tenant paying all rents, landlord’s costs being paid or the tenant entering into an authorised guarantee agreement (to guarantee the assignee’s performance of its obligations under the lease). The assignee may also be required to obtain guarantors or provide a rent deposit.
The tenant should be fully aware of any requirements, circumstances or conditions, and whether any are subject to a reasonableness test, to ensure it is fully prepared when making an application to the landlord.
Underletting
Underletting is often permitted, although many leases prohibit underletting of part unless it relates to a permitted part only (such as an entire floor). The landlord’s consent is usually required (not to be unreasonably withheld or delayed) and there may be conditions to be met in relation to the underlease, eg. that the underlease is on the same terms as the head-lease, reviews of rent are on the same dates and the form of underlease is approved by the landlord. A common provision is that the rent to be reserved in the underlease must not be less than the rent payable under the head-lease. A number of the largest commercial property owners in the UK have issued a declaration that they will not enforce such a restriction on underletting.
Preparation is essential
Good preparation is therefore essential. Tenants should ensure that they consider their leases (and any supplementary documentation) carefully and liaise with their solicitors accordingly. Tenants must be especially careful when exercising a break option, as these are time critical, sometimes only available on a periodic basis (for instance, once every 5 years) and sometimes only once during the term of the lease. Failure to comply may result in the tenant having to wait another 5 years or until the expiry of the term to be free of the lease, assuming it is not able to assign or underlet.
If you are unsure about any of your lease terms, you should contact your solicitor for further advice as soon as possible.
If you would like any further information about the issues raised in this article or any other aspect of Property law, please contact Lynne Horay on 0207 404 0606.
This guide is for general use and interest only and should not be relied upon as providing specific legal advice. |
