The economic uncertainties have impacted upon most sectors making it difficult for a business to plan for anything other than its short-term requirements. Manufacturing is no different and without confidence in a stable order book or an otherwise attractive pipeline, many prospective manufacturer tenants are reluctant to commit to what they perceive to be inflexible, long term and expensive leases. David Fanchi, a partner at Thomas Eggar legal firm looks into the issue of negotiating leases.
Manufactuers’ hesitance has created a problem for landlords, many of whom are highly leveraged and rely upon a stable rental income from their properties to service the borrowing they have secured against them. In addition to an income stream, a further issue of which investor landlords are all too aware, is the underlying value of their investment. That value can diminish over time, especially towards the expiry of the lease or the date on which a tenant can exercise a break.
In many circumstances demand for leases is currently being outstripped by supply, so landlords are anxious to attract tenants. Similarly landlords with tenants in place under leases that could soon expire (or when tenants’ break clauses are approaching) are often prepared to listen to requests for an incentive not to vacate. These incentives can take many forms, but common examples are rent free periods, capital payments, and agreements about future dilapidations liabilities or a longer term reduction in rent.
Andy Gibbs, an associate and head of business space based in the Southampton office of leading real estate advisory firm Vail Williams LLP, says that tenants should take the opportunity to consider the value of any break clause in their leases, especially if they are aware that they will not be exercising it as the landlord may be prepared to ‘buy back’ the break right. Gibbs recently negotiated a payment of £350,000 to one of his clients in return for giving up a break right in a lease of a 20,000 sq ft unit.
Many manufacturers find that their space requirements change over time, but, like tenants in all other sectors, wait until the end of the lease to consider moving to more suitable premises. Gibbs says, “moving is not the only option. In order to keep you in the property landlords could be surprisingly accommodating. By exploring the options with a landlord, a tenant may well find there is now flexibility that they did not think existed.”
When it comes to negotiating a new lease, either when considering a renewal or a lease of new premises, the message from the market to tenants is to ensure to ask for what you want. While it is true to say that landlords remain keen for lease durations to be reasonably lengthy, a tenant who agrees to take a long lease should explore the availability of regular break options and whether a discounted or stepped rent could be agreed in return. This is particularly important for a growing manufacturer whose requirements for space are constantly evolving. It is also important for a tenant to ensure that any lease, other than a very short term lease, contains provisions that allow the lease to be assigned or the premises to be sub-let without the landlord attaching onerous conditions to the same. This will allow a tenant to transfer the lease to a willing third party, or at least sublet any surplus space within the premises in the event that the tenant cannot part with the lease.
In some circumstances, tenants will wish to ensure that their lease is terminated as soon as possible where that space is surplus to their requirements. The reality of the market means that if the landlord thinks it cannot obtain a new letting quickly and on acceptable terms, it may look for a reason to argue that the tenant has not validly ended the lease. Tenants must therefore be aware of not only when their leases can be brought to an end but, equally importantly, whether they need to take any steps to facilitate this. For example, a lease could contain preconditions to a break clause which may make it difficult to implement the break without sufficient planning.
As well as the possibility of contractual restrictions on termination, statute may also regulate how and when a tenant can terminate. Some leases of business premises in England and Wales are affected by an Act of Parliament that was passed in 1954. This imposes a statutory framework, which may apply to termination of a lease (both at the end of the term and on a break date) in addition to any requirements in the lease. If a tenant does not abide by all of the termination requirements then it is at risk that the lease with all of its inherent liabilities will continue.
It is therefore crucial for tenants to properly understand both the contractual and statutory termination provisions and procedures that will apply to them when their leases end.
T: 01635 571077