Getting it Write
02 July 2009
Getting it Write
In the current climate, being a landlord or a tenant brings its own problems. If the tenant cannot pay the rent or no longer needs to occupy the whole of the premises, what avenues are open to each party to preserve their own business interests?
Occasionally, the parties may be able to agree on an equitable way forward. However, it is much easier to use the terms of the existing lease to resolve the issue. Both parties should always consider what may happen during the course of the lease and write appropriate terms into the document from the outset.
Landlord’s perspective
A landlord will want to ensure that its income is secure for the term of the lease. If references or checking company accounts fail to give the necessary comfort on the tenant’s ability to pay, the landlord should consider extra security. This could involve:
- getting a third party - perhaps directors of the company; or a more experienced individual trader; or a parent company - to give a guarantee. The problem with director guarantees is that if the tenant company becomes insolvent, very often the directors will be, too, and thus the guarantee may be worthless. Parent company guarantees are only as good as the company balance sheet at the date of the lease. Companies can be moved from group to group; companies can be wound up.
- asking the tenant to put forward a sum of money as a rent deposit - typically a multiple of the rent - from one quarter up to one year. This money will available to the landlord if the tenant fails to pay the rent, or otherwise defaults: i.e., by not keeping the premises in repair.
- insisting that as much money is paid in advance as possible: rent paid quarterly is better than rent paid monthly.
Tenant’s perspective
A tenant should always ensure that it can minimise its liabilities, if the business does not go as well as expected. The lease itself should be as flexible as possible:
- never take too long a lease. A tenant is liable on the lease covenants for the whole term.
- ensure that the lease can be sold or assigned. This enables the tenant to give up all responsibility for the rent and other outgoings.
- ensure that the premises can be sublet either as a whole or as to any part - this enables the tenant to get a third party to help share the burden of the rent and outgoings.
- negotiate one or more break clauses. Thus, if things are not going so well, the tenant can terminate the lease, pay the rent to the break date and walk away. These break clauses are notoriously difficult to agree, and the tenant must ensure that they are not made conditional on the tenant complying with its lease covenants. If they are, the landlord may be able to negate the break clause by pointing to minor breaches (the famous example being painting with two coats of paint rather than three) and so preventing the tenant bringing the lease to an end.
Thus, seeking expert advice on getting the lease terms correctly written at the outset may avoid problems at the end of the day.
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