It is rare for any organisation to stay in the premises they have occupied since their inception. Demands and needs change, and some companies grow and require more space to breathe, while others find that new technology equates to smaller premises and cost savings. A number, however, struggle and must cut their cloth accordingly. But regardless of the reason, moving presents problems and costs, especially in a healthcare setting. So, what are the options for practices when contractual issues place obstacles in the way of a relocation?
Differing options
Jessica Booz, a partner and commercial property solicitor at VWV, says that a leaseholder has the options of assignment, subletting and the use of any break clauses that are available. Alternatively, she says that “it may be possible to talk with the landlord to negotiate a surrender of the whole or part of the property depending on the market at the time”. However, as Nathan Hinks, an associate at Wright Hassall, explains, this is not an automatic right as “a landlord may agree an early surrender of a lease, but there is no obligation on them to do this – it will be in their gift”.
A leaseholder has the options of assignment, subletting and the use of any break clauses that are available
Not many people realise that, as Jessica highlights, in some leases, either a landlord or tenant can end a lease before the end of the contractual term via a break clause. As she says, “break clauses can be a valuable asset for a tenant wanting to end their obligations early”. It should be noted at this point that break clauses can be fixed or rolling. In describing both, Nathan says that “a fixed break clause is usually exercised on a fixed date during the lease term. In comparison, rolling break clauses are exercisable at any time during the term, upon sufficient notice.” Practices should understand which of these they may have and how they operate.
Making the break
Break options are often subject to conditions which must be complied with. If they are not, a landlord can refuse to accept that the lease has come to an end.
As with anything legal, good advice is essential, says Jessica. This is because “there are often long notice periods, sometimes six months or more, needed before a break option can be exercised; it is important that time periods are not missed”. Nathan thinks the same, adding that not serving notice correctly is a serious risk. So, his first point of reference is the lease as it may prescribe a particular form of notice. Ideally, this would have been negotiated and agreed on during the drafting of the lease “so that the tenant is clear on its responsibilities in serving the notice and the landlord is required to act reasonably in accepting this”.
Break options are often subject to conditions which must be complied with. If they are not, a landlord can refuse to accept that the lease has come to an end
There is case law for the enforcement of conditions. After all, in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd (1997), Lord Hoffman famously said that “if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on a pink paper…”
Conditions and requirements for making a break
Occupation and rent
A common condition for breaking a lease that Jessica draws attention to is how to give up occupation. Here she says, “it is important that conditions are negotiated carefully; some conditions, such as a condition to provide ‘vacant possession’, can be difficult to comply with”. Nathan explains more. He says that “the requirement for vacant possession is considered an onerous obligation. It is much more commonplace now to see reference to a property being returned ‘free of a tenant’s occupation or continuing sub-leases’.”
Another requirement is for a tenant to be up to date with rent, and this, says Jessica, “could also include interest on any historic late payments”. Worryingly, she says that a landlord does not have to confirm to a tenant whether they are up to date with rent, etc – they could choose to wait until after the time for exercising the break has passed before claiming that a break was not validly exercised.
Covenants
Then there is the matter of dilapidations, also known as repairing covenants, which cover a premise’s condition when handed back – for practices that have made changes for clinical reasons, this could be burdensome. Nathan explains that the end of the lease “usually acts as a trigger to review dilapidations issues since the tenant’s obligations to reinstate and yield up the premises become relevant”. He advises that once a break notice is served, it is likely that the landlord will begin preparing a schedule of dilapidations. Another concern for Nathan is that a landlord may still be able to pursue a dilapidation claim. In fact, he says that “landlords may find it easier to claim for dilapidations upon the termination of a lease because there are fewer statutory restrictions”.
It is fair to “ask a landlord for confirmation of the steps the tenant needs to take to comply with any conditions, while also requesting a schedule of dilapidations in relation to any repair works”
Consider the impact of covenants – these too can prove to be problematic. Nathan has seen first-hand how tenants must follow all covenants and not be in material breach of repairing covenants. As a result, he recommends that “tenants ask their landlord to accept the break notice upon payment of an agreed amount to cover any outstanding breaches”. He also thinks it is fair to “ask a landlord for confirmation of the steps the tenant needs to take to comply with any conditions, while also requesting a schedule of dilapidations in relation to any repair works”. If there is disagreement over any outstanding sums due, Nathan recommends paying “on a without prejudice basis and disputing the matter later”.
But with the potential for so many terms that need to be met to exercise a break, practices are advised to protect their position by keeping evidence of compliance including how the notice was delivered.
Moving in
Lastly, for those moving to new premises, there’s a warning from Jessica – “make sure that the negotiations on them are completed well in advance to avoid having to move items into storage if the new premises are not ready”. She reminds us that it is critically important to leave on or before the day of the vacation as staying longer can also invalidate a break option.
What if there’s no break clause?
Break clauses are common, but they are not universal. They are also not that frequent. However, Jessica says that those who find themselves in a situation without a break clause could see if the lease allows a tenant to assign the whole of the lease to another. Alternatively, they may be able to sublet part or the whole of the premises.
In terms of assignment or subletting, Nathan says that landlord consent may be required “which can be subject to certain conditions being met which are usually contained in the lease”. The advice to practices, therefore, is to check for conditions that need to be complied with before assigning or subletting. Jessica gives an example: “A landlord will want to know that the new party occupying their premises is able to pay the rent and comply with the lease terms. This means you may have to provide accounts and/or references for the incoming tenant; the landlord may be allowed to demand a guarantor or rent deposit from the new tenant.” Thankfully, in most cases, a landlord cannot unreasonably withhold or delay giving their consent, says Jessica. Instead, they must respond quickly and reasonably to any request to assign or sublet. Nevertheless, Nathan adds, a landlord can refuse if there are any arrears of rent, any other sums under the lease or “if it considers that the proposed tenant or undertenant is not of sufficient financial standing”.
An outgoing tenant is often required to provide a guarantee to the landlord which means that if the new tenant does not comply with the lease, the landlord may still yet pursue the original tenant
With a note of caution, Jessica warns practices thinking of subletting that “they remain liable for compliance with the terms of the lease, including the payment of rent. Being no longer in occupation and so able to control compliance with the covenants under the lease could make this difficult.” In comparison, under an assignment, the primary obligation to pay the rent and comply with other covenants, such as repairs, moves to the new tenant. However, says Jessica, “an outgoing tenant is often required to provide a guarantee to the landlord which means that if the new tenant does not comply with the lease, the landlord may still yet pursue the original tenant.”
A clean break?
So with, in Nathan’s view, serious potential for a liability to remain, subletting “may not always be a clean break and so may not be suitable if a tenant is looking for a ‘cut and run’”. He observes that due diligence on those taking over an assigned or sublet lease is essential.
One last point from Jessica: it makes sense to ensure that a sublease terminates a few days before the end of the main lease. As she puts it, “this ensures that the original will be able to give vacant possession to the landlord at the end of the lease to avoid the penalties that flow from not doing so”.
A negotiating tool
It is logical for any tenant to consider an upcoming break clause as a way to negotiate a better deal; however, Jessica says that landlords are aware of this tactic. “It is vital that any negotiations are concluded before the time for exercising the break expires as any leverage the tenant may have had expires at that point,” she explains. She’s seen landlords push negotiations out deliberately. And, of course, a tenant wanting to negotiate needs to consider whether they really want to move as, again, Jessica has seen landlords call a tenant’s bluff. She says to remember that “once a break notice is served it cannot be withdrawn unilaterally and a tenant would then be in the unenviable position of having to negotiate a new lease with their landlord, potentially on worse terms than before”.
Summary
There are numerous ways of disposing of property. The common thread to all is that good legal advice is necessary for both those leaving and those taking on premises. It is very easy to act in haste and repent at leisure.
