Commercial leases between a landlord and tenant create a legal relationship that can be ongoing for many years. However, there may be times when the lease needs to be adapted to take into account a change in circumstances.
The current COVID-19 pandemic has heightened the need for many businesses with commercial leases to reconsider their situation. The economic impact of the pandemic has been far-reaching, affecting many businesses cashflow, future prospects and has even lead to many closures. Rent is usually a considerable expense for most businesses; therefore, it is something that businesses owners will want to revisit and review, particularly if cashflow is restricted.
HOW DOES A COMMERCIAL LEASE RESTRUCTURE WORK?
A commercial lease restructure will happen when one of the parties wishes to change the terms under the existing lease. It can take some time to come to an agreement and obtaining legal advice and representation from an early stage can ensure that your rights and interests are protected. The party looking to amend the lease must know exactly what their goals are before approaching the other party.
When an agreement is reached, the parties can pass the agreed Heads of Terms to their lawyers to draw up a Deed of Variation to the original lease. This is then attached to the original lease to show the agreed variations. A lease restructure will allow a tenant time to review their business requirements for the medium to long-term, where leases can last for many years. Tenants can use this as a bargaining tool since landlords may not want the expense and time to find a replacement and may be happy to negotiate changes to keep the current tenants.
WHAT MIGHT BE CONSIDERED IN A RESTRUCTURE?
Each lease is unique and so the changes will depend on the specific circumstances, however, some common examples of what could be done in a lease restructure include:
- Varying the demise
- Exercising or removing break option clauses
- Changing how often rent is paid
- Capping or controlling any service charge
- Varying any existing alienation clauses
- Amending errors in the original lease
CONSIDERATIONS FOR A COMMERCIAL TENANT
There are various issues that a commercial tenant could consider in relation to a restructure of the lease that could be beneficial to them. These include:
- Rent deferments
- Base-rent reductions
- Subletting and assignment clauses
- Profit-sharing clauses if the business is sold (in relation to the percentage that the landlord receives)
- Renewal options
- Take-back provision
- Liability that survives assignment
- The use of CVAs/Insolvency arrangements
UNDERSTANDING BUSINESS NEEDS FOR A RESTRUCTURE
In order to negotiate a worthwhile restructure that is beneficial to your needs, the tenant must understand both their business needs, as well as information concerning:
- Current market conditions
- Expected trends
- Analysis of the costs involved with renewing the lease or moving to a new lease elsewhere
- The expected expenditure for future service charges
LANDLORDS WILL OFTEN BENEFIT FROM RESTRUCTURING
Tenants might be cautious of asking their landlord to consider a lease restructure, but an open discussion about the issues can often result in an outcome that is beneficial for all parties. A tenant that is struggling to pay the rent is not an asset to a landlord, who will then have to pursue other avenues to recoup the outstanding amounts.
Typically, both the tenant and landlord will benefit from a restructure since the costs of securing a new tenant can be substantial, making restructuring a more financially sound approach. Both parties can benefit from a lease restructuring so long as it is done correctly and is fully documented.
WHAT MIGHT A LANDLORD EXPECT IN EXCHANGE FOR A LEASE RESTRUCTURE?
In exchange for the restructure, the landlord will generally want to do some or all of the following:
- Extend the lease or move forward the tenant’s option to extend the lease
- Obtain more frequent reports on the tenant’s finances
- Receive details of the tenant’s efforts to mitigate losses
- Obtain additional security or guarantee from the tenant
In return for this, the tenant will want to negotiate incentives from the landlord, such as a rent reduction or rent-free period, removal of onerous terms of the lease or a cash lump sum.
CONTACT OUR SPECIALIST COMMERCIAL PROPERTY TEAM IN LONDON
Commercial lease restructures can be used to benefit both parties and ensure businesses can continue operating, especially in economically volatile situations, such as during the current pandemic. Our commercial property team have the legal knowledge as well as the industry experience that means we can offer specialist advice to clients considering such a restructure. These negotiations can take some time and it is advisable to get legal advice as early as possible.
What distinguishes our Commercial Property Team is that not only do we have leading Commercial Lease experts but also contentious property, dispute lawyers and insolvency specialists who can provide a complete service for either commercial landlords or commercial tenants. We pride ourselves on our swift responsive approach and our team has recently been commended in The Times Best Lawyers 2021.