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Alienation
Letting a Tenant off the Hook
23/January/2013
With a business tenancy, agreeing the documentation is rarely straightforward at the best of times so, unless the lease contains a tenant–break, a landlord won't normally expect the tenant to want to quit before expiry of the contractual term.
When a tenant asks to be let off the hook, whether to agree or refuse is not necessarily an easy decision. The preference, normally in the lease, is to want the tenant to assign its interest or underlet the premises.
For the tenant, both alternatives may be fraught. The tenant must procure an assignee whose status either satisfies criteria or, if the lease does not specify criteria, to ensure no grounds upon which the landlord could reasonably refuse consent. An acceptable substitute could prove hard to find where the supply of ’decent’ tenants has dried up.
On assignment, and depending on the date of lease, the outgoing tenant might be required to sign an authorised guarantee agreement, whereby per privity of contract the outgoing tenant remains liable for the rent, etc., should its assignee default and only bow out after that assignee assigns. For leases before 1996, the first tenant remains liable throughout the term regardless. Privity can prove onerous. The outgoing tenant has no control over its assignee's conduct, the landlord’s enforcement notice comes out of the blue.
With under–letting, the tenant-landlord stays in control, but responsible to the superior landlord for rent, etc, regardless of whether the under-tenant pays. Leases often require an under-lease to be contracted out of Landlord and Tenant Act 1954 so for the tenant it's a matter of finding someone that doesn't mind not having any legal right to remain in occupation after expiry of the under-lease.
Where there is quality demand for premises, or the tenant’s business is sold as a going–concern, the tenant is only likely to request outright quit when not wanting to risk residual liability. Where there is little or no demand, the landlord's risk includes a lengthy void, expensive insurance, hefty utility bills from deemed supply contracts, structural deterioration, vandalism, and, unless the building is listed or below the rateable value limit, empty property rates. A property unoccupied for a long time may in itself be a deterrent.
Whether the tenant is an individual or a company and has a surety/guarantor is relevant. Net asset value should be ascertained. Regardless of any effect on tenants of proceedings for non–payment it is generally fruitless for landlords to pursue a ’man of straw’.
With a company–tenant, care should be taken to prevent the company becoming dormant, affecting investment value and creating problems for asset management. The use of dormant companies, formerly a tax loophole but nowadays a ring–fencing device for the trading or parent company, is widespread. Investors are notoriously lax in checking the prevailing status of existing tenants. With small company tenants, whose landlord is passive, or where the rent is paid on behalf of the tenant, the legal tenant may have been dissolved or the occupation transferred without consent. When individual–tenant(s) incorporate, applying to assign the tenancy to the company is frequently overlooked. Often only when a notice is to be served, assuming due diligence, or the tenant requests something is an irregularity discovered; it may then become a matter of whether or not the landlord is deemed to have acquiesced.
For a decision to accept surrender or vary terms of the tenancy involving an assignee, care should be taken to avoid prejudicing privity of contract with the previous or first tenant and surety. Surrender ends the tenancy. Varying terms could limit the first or previous tenant’s and surety liability to that date.
Generally, tenants are honourable and asking to be let off the hook is symptomatic of wanting to do the decent thing. When, for whatever reason, landlords refuse, tenants resort to roundabout means: nonpayment of rent(s), removing stock and fixtures to defeat bailiffs in the hope of forcing the landlord to re-enter, abandoning premises, and handing back the keys. With company tenants administration is a solution. Landlords may consider pre–packs, the pre-arranged sale of (parts of) the business to persons of the failed company, unethical but the practice is within the law. The administrator must maximise the value of the company’s assets as soon as possible so as to pay creditors.
A simple way to accommodate the tenant's request is to agree surrender in conjunction with simultaneous reletting to a new tenant or disposal. The landlord (agents) handles the marketing, the cost of which could be shared or borne by the outgoing tenant. Another way where the landlord is confident of early reletting is for the tenant to pay a capital sum equivalent to 2–3 times passing rent, to remove all fittings and fixtures and vacate the premises in a clean and tidy condition. With shops the tenant out sooner than later may be better because a snag in allowing a tenant in occupation whilst premises are marketed is that prospective tenants can ask about the trading position and be deterred by comments.
When a tenant is in trouble, often the writing is on the wall and the message may also be a dire warning for the location yet many landlords isolate the situation and fail to avoid the downfall by disposing of the investment before wider consequences become obvious. For premises in demand reletting is less hassle, but elsewhere it makes no sense, at least not to me, to hold a property for the sake of it. Investors may dislike paying tax but a substantial difference in value can exist between a property with vacant possession and let to a tenant whose investment covenant is sought after. To keep the property for income is only worthwhile if trouble-free. "
When tenants want out, change is in the offing. For landlords, the decision is whether to go with the flow, or resist and have change forced upon them.
When a tenant asks to be let off the hook, whether to agree or refuse is not necessarily an easy decision. The preference, normally in the lease, is to want the tenant to assign its interest or underlet the premises.
For the tenant, both alternatives may be fraught. The tenant must procure an assignee whose status either satisfies criteria or, if the lease does not specify criteria, to ensure no grounds upon which the landlord could reasonably refuse consent. An acceptable substitute could prove hard to find where the supply of ’decent’ tenants has dried up.
On assignment, and depending on the date of lease, the outgoing tenant might be required to sign an authorised guarantee agreement, whereby per privity of contract the outgoing tenant remains liable for the rent, etc., should its assignee default and only bow out after that assignee assigns. For leases before 1996, the first tenant remains liable throughout the term regardless. Privity can prove onerous. The outgoing tenant has no control over its assignee's conduct, the landlord’s enforcement notice comes out of the blue.
With under–letting, the tenant-landlord stays in control, but responsible to the superior landlord for rent, etc, regardless of whether the under-tenant pays. Leases often require an under-lease to be contracted out of Landlord and Tenant Act 1954 so for the tenant it's a matter of finding someone that doesn't mind not having any legal right to remain in occupation after expiry of the under-lease.
Where there is quality demand for premises, or the tenant’s business is sold as a going–concern, the tenant is only likely to request outright quit when not wanting to risk residual liability. Where there is little or no demand, the landlord's risk includes a lengthy void, expensive insurance, hefty utility bills from deemed supply contracts, structural deterioration, vandalism, and, unless the building is listed or below the rateable value limit, empty property rates. A property unoccupied for a long time may in itself be a deterrent.
Whether the tenant is an individual or a company and has a surety/guarantor is relevant. Net asset value should be ascertained. Regardless of any effect on tenants of proceedings for non–payment it is generally fruitless for landlords to pursue a ’man of straw’.
With a company–tenant, care should be taken to prevent the company becoming dormant, affecting investment value and creating problems for asset management. The use of dormant companies, formerly a tax loophole but nowadays a ring–fencing device for the trading or parent company, is widespread. Investors are notoriously lax in checking the prevailing status of existing tenants. With small company tenants, whose landlord is passive, or where the rent is paid on behalf of the tenant, the legal tenant may have been dissolved or the occupation transferred without consent. When individual–tenant(s) incorporate, applying to assign the tenancy to the company is frequently overlooked. Often only when a notice is to be served, assuming due diligence, or the tenant requests something is an irregularity discovered; it may then become a matter of whether or not the landlord is deemed to have acquiesced.
For a decision to accept surrender or vary terms of the tenancy involving an assignee, care should be taken to avoid prejudicing privity of contract with the previous or first tenant and surety. Surrender ends the tenancy. Varying terms could limit the first or previous tenant’s and surety liability to that date.
Generally, tenants are honourable and asking to be let off the hook is symptomatic of wanting to do the decent thing. When, for whatever reason, landlords refuse, tenants resort to roundabout means: nonpayment of rent(s), removing stock and fixtures to defeat bailiffs in the hope of forcing the landlord to re-enter, abandoning premises, and handing back the keys. With company tenants administration is a solution. Landlords may consider pre–packs, the pre-arranged sale of (parts of) the business to persons of the failed company, unethical but the practice is within the law. The administrator must maximise the value of the company’s assets as soon as possible so as to pay creditors.
A simple way to accommodate the tenant's request is to agree surrender in conjunction with simultaneous reletting to a new tenant or disposal. The landlord (agents) handles the marketing, the cost of which could be shared or borne by the outgoing tenant. Another way where the landlord is confident of early reletting is for the tenant to pay a capital sum equivalent to 2–3 times passing rent, to remove all fittings and fixtures and vacate the premises in a clean and tidy condition. With shops the tenant out sooner than later may be better because a snag in allowing a tenant in occupation whilst premises are marketed is that prospective tenants can ask about the trading position and be deterred by comments.
When a tenant is in trouble, often the writing is on the wall and the message may also be a dire warning for the location yet many landlords isolate the situation and fail to avoid the downfall by disposing of the investment before wider consequences become obvious. For premises in demand reletting is less hassle, but elsewhere it makes no sense, at least not to me, to hold a property for the sake of it. Investors may dislike paying tax but a substantial difference in value can exist between a property with vacant possession and let to a tenant whose investment covenant is sought after. To keep the property for income is only worthwhile if trouble-free. "
When tenants want out, change is in the offing. For landlords, the decision is whether to go with the flow, or resist and have change forced upon them.