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Chasing Rainbows
20/February/2014
Unlike investing in stocks and shares where the volatility of share prices and uncertainty of dividends can lead to long term buy and lose, investment in property offers two advantages: firstly, because the relationship between landlord and tenant rests on a legally-binding contract, there is the potential for both capital and rental growth. Secondly, unlike the Stock Market where in the scheme of things individual private investors have little or no influence over the company’s performance, the property market offers the thought of being in control.
I emphasise ‘thought’ because landlords are not actually in as much control as they might like to think. The landlord owns the building, not the tenant’s business and tenants are not obliged to keep the landlord informed as regarding the intention for the business. All that a tenant is obliged to do is comply with the terms and conditions of the lease and even that the terms and conditions would be subject to any overriding legislation and/or business tenancy case-law. For example, a shop let to multiple retailer which might be thought a secure investment and hence command a higher capital value could fall in valley simply by the multiple retailer deciding to close the branch and assigning the tenancy or subletting the premises to a nobody.
Stocks and shares and property are forms of illiquid investment, but the stock market for the most part less so since buying and selling can be transacted within seconds, with middle-men, or market-makers, to take up the slack whenever demand and supply fluctuate. With property, however, there are no market-makers as such; to buy and sell a property requires a seller and a buyer, and to transact at the desired price requires a seller or buyer at that price.
With stocks and shares, share prices are published and during market hours a trade can be executed at or around the published price. It’s not like that with property: no published prices in advance, no certainty that what someone got for a particular property would result in at least the same price for a virtually identical property paid by someone else. As for value, some say that’s whatever the property fetches but actually the price could simply be a measure of worth for the buyer: otherwise, the market value is based upon one person’s opinion; an informed opinion provided by a professional, but an opinion nevertheless.
Despite the underlying value of property being anyone’s guess, another layer of value is added to be on the safe side. The income from a property let to a good covenant on a long lease also constitutes an investment. All other factors remaining constant, the best time to sell the investment layer is when the end of the lease is so far off that it becomes impossible for mere mortals to predict what would happen by then. For the same reason, it is also the worst time to buy, but that doesn’t stop investors piling in regardless. Because it is easier to mortgage a property let on a long lease and because the total income, ignoring any reviews, is known in advance, the present value of that income can be calculated.
The attraction and value of that present value fluctuates according to confidence in the investment market. Investment confidence varies with bank lending criteria. The easier and cheaper it is to borrow, the more risk may be taken, the higher the price. Conversely, the harder, the more expensive, the less risk, the lower the price.
A paradox of investment-thinking is the difference in attitude between experienced professional investors and everyone else. EPIs focus on the bottom-line: the worst scenario. Challenging at the best of times, protecting the bottom-line is not easy when wanting to invest at a time of improving sentiment. Sentiment is a measure of confidence. Increasing confidence attracts more investors and in turn becomes a virtuous circle, onwards and upwards. Momentum investing is like playing the game of musical chairs: you hope there’ll be somewhere to sit when the music stops. The property game is not limited to a few seats. Widespread availability of propositions enables investors to venture further afield. Outside the hot spots, yields are generally higher not because those places are necessarily neglected through oversight but that growth is hard to come by or non-existent. Despite lower prices, often there is considerably more risk.
On paper it makes sense to capitalise on the difference between the cost of borrowing and the yield obtainable. In practice, it may not make sense at all. A common failing is overestimating the growth potential and underestimating the cost of achieving growth. Often, both factors are symptomatic of tenant-covenant fixation.
Play your cards right and a great deal of money can be made from trading in momentum. Investing for ever requires a different mind-set. Not only a question of timing but also whether the initial yield would be sustainable. After an investment is bought, the investor becomes a landlord and experiences the reality of asset management. A test of performance is the rent review or lease renewal. Naturally, investors/landlords desire a return on capital that is commensurate with their expectations, but at rent review (assuming to market rent) or lease renewal the actual landlord’s aspirations are irrelevant and depending upon skill of the tenant’s advisers could result in less than expected. Moreover, a lot can happen to the whereabouts and/or to a property as time passes: the economy might improve but not rub off on a particular property. To cap it all, the tenant might go broke and the new tenant an inferior covenant.
Whatever the reason for the purchase price, whether sellers offering higher yields for the sole purpose of achieving the highest possible price or high prices bringing out better properties that would otherwise not be sold so commanding scarcity value, any difference between the fundamental value and the investment layer reflects buyers chasing rainbows.
I emphasise ‘thought’ because landlords are not actually in as much control as they might like to think. The landlord owns the building, not the tenant’s business and tenants are not obliged to keep the landlord informed as regarding the intention for the business. All that a tenant is obliged to do is comply with the terms and conditions of the lease and even that the terms and conditions would be subject to any overriding legislation and/or business tenancy case-law. For example, a shop let to multiple retailer which might be thought a secure investment and hence command a higher capital value could fall in valley simply by the multiple retailer deciding to close the branch and assigning the tenancy or subletting the premises to a nobody.
Stocks and shares and property are forms of illiquid investment, but the stock market for the most part less so since buying and selling can be transacted within seconds, with middle-men, or market-makers, to take up the slack whenever demand and supply fluctuate. With property, however, there are no market-makers as such; to buy and sell a property requires a seller and a buyer, and to transact at the desired price requires a seller or buyer at that price.
With stocks and shares, share prices are published and during market hours a trade can be executed at or around the published price. It’s not like that with property: no published prices in advance, no certainty that what someone got for a particular property would result in at least the same price for a virtually identical property paid by someone else. As for value, some say that’s whatever the property fetches but actually the price could simply be a measure of worth for the buyer: otherwise, the market value is based upon one person’s opinion; an informed opinion provided by a professional, but an opinion nevertheless.
Despite the underlying value of property being anyone’s guess, another layer of value is added to be on the safe side. The income from a property let to a good covenant on a long lease also constitutes an investment. All other factors remaining constant, the best time to sell the investment layer is when the end of the lease is so far off that it becomes impossible for mere mortals to predict what would happen by then. For the same reason, it is also the worst time to buy, but that doesn’t stop investors piling in regardless. Because it is easier to mortgage a property let on a long lease and because the total income, ignoring any reviews, is known in advance, the present value of that income can be calculated.
The attraction and value of that present value fluctuates according to confidence in the investment market. Investment confidence varies with bank lending criteria. The easier and cheaper it is to borrow, the more risk may be taken, the higher the price. Conversely, the harder, the more expensive, the less risk, the lower the price.
A paradox of investment-thinking is the difference in attitude between experienced professional investors and everyone else. EPIs focus on the bottom-line: the worst scenario. Challenging at the best of times, protecting the bottom-line is not easy when wanting to invest at a time of improving sentiment. Sentiment is a measure of confidence. Increasing confidence attracts more investors and in turn becomes a virtuous circle, onwards and upwards. Momentum investing is like playing the game of musical chairs: you hope there’ll be somewhere to sit when the music stops. The property game is not limited to a few seats. Widespread availability of propositions enables investors to venture further afield. Outside the hot spots, yields are generally higher not because those places are necessarily neglected through oversight but that growth is hard to come by or non-existent. Despite lower prices, often there is considerably more risk.
On paper it makes sense to capitalise on the difference between the cost of borrowing and the yield obtainable. In practice, it may not make sense at all. A common failing is overestimating the growth potential and underestimating the cost of achieving growth. Often, both factors are symptomatic of tenant-covenant fixation.
Play your cards right and a great deal of money can be made from trading in momentum. Investing for ever requires a different mind-set. Not only a question of timing but also whether the initial yield would be sustainable. After an investment is bought, the investor becomes a landlord and experiences the reality of asset management. A test of performance is the rent review or lease renewal. Naturally, investors/landlords desire a return on capital that is commensurate with their expectations, but at rent review (assuming to market rent) or lease renewal the actual landlord’s aspirations are irrelevant and depending upon skill of the tenant’s advisers could result in less than expected. Moreover, a lot can happen to the whereabouts and/or to a property as time passes: the economy might improve but not rub off on a particular property. To cap it all, the tenant might go broke and the new tenant an inferior covenant.
Whatever the reason for the purchase price, whether sellers offering higher yields for the sole purpose of achieving the highest possible price or high prices bringing out better properties that would otherwise not be sold so commanding scarcity value, any difference between the fundamental value and the investment layer reflects buyers chasing rainbows.
Framework of a lease
01/December/2013
The framework or construction of a lease, its content and wording, lays down the contractual responsibilities and obligations that the landlord and tenant have with one another in relation to the premises. The operation, management and enforcement of the terms and provisions of a lease are subject to business tenancy law. A branch of property law, business tenancy law is a dynamic subject.
With business premises, there is no standard form of lease, so the terms and conditions of each and every tenancy will vary depending upon the requirements and experience of the first landlord and first tenant and their respective advisers. Since a tenancy is often granted for a number of years, the terms and conditions, together with the wording and phrasing of those terms and conditions, will remain unchanged for the duration of the contractual term of tenancy, and sometimes beyond. The only ways any of the terms and/or conditions, the wording and/or phrasing, can be changed at any time during the term is either by rectification of a mistake (if the original parties are still involved) or by mutual agreement.
Although a tenancy can last for years, there are two relationships that can and do change. The first is the relationship between the landlord and tenant: that relationship is changeable because the superior landlord’s interest may be bought and sold or transferred and (subject to the provisions of the tenancy) the same for any intermediate landlord, and (subject to the provisions of the tenancy) the tenant’s interest may be assignable or the premises underlet.
The second is the relationship between the premises and the (open) market: that relationship is continually changing because, whereas the property (the building) is a fixed structure, the relationship between the location and position of the building and its surroundings can be affected by changes in those surroundings, and of which the landlord and/or tenant is likely to have no control.
The reason business tenancy law is a dynamic subject is that the operation and enforcement of the terms and provisions of the tenancy will depend upon the actual wording in the lease and associated documentation, regardless of what might or might not be happening in the open market. The wording and phrasing in leases is also fashionable. So, for example, if the premises were let for 25 years from 1990 with rent reviews at 5 yearly intervals, then the wording and phrasing would have been based on lease-draftsmen thinking in 1990 or before, whereas the effect of that wording and phrasing might have a different consequence at first rent review in 1995, but the consequence could be different again in 2000, and different again in 2005, and 2010 and on expiry 2015. Although words are neutral, positive and negative conniptions can be attached to their meanings and whether a word or phrase should be interpreted literally or by reference to what is known as “presumption in favour of reality” would depend upon the business tenancy law case-precedent and valuation practice at the appropriate time.
Some business tenancy law is legislation, acts of parliament, statutes, orders and regulation, but much is based on case-law: a court decision and interpretation arising out of disputes. Generally, the courts are loathe to interfere in the wording of a commercial contract, regardless of how unfair the consequences of the agreement, and tend to confine to the interpretation of the wording.
A general principle of construction that applies to all documents is that a lease must be construed as a whole and an individual clause in a lease should never be read in isolation from the rest of the lease. The interpretation of construction (wording and phrasing in documents) can be fashionable, but nowadays there is a presumption in favour of reality and commercial common/good sense.
Since the 1970s, the explosive growth of case-law has reflected the monetary effect of different interpretations by surveyors, lawyers and courts on the covenants in the lease. (In one case, the difference in opinion equated to £500,000 a year.) In 1984, in my booklet published then, I said that the variation in business leases was extensive. Then were the old ground leases from the 1880s/1890s for a term of 99 years at a fixed low ground rent, the medium to long-term leases granted during the 1920s to reflect difficulties in attracting tenants at that time, the familiar 21 year term originating in the 1950s/1960s often incorporating pre-fixed rental increases at 7 yearly intervals; and from the 1960s to 1980s, a mixture of 3, 5, 7, 9,10,12,14, 15, 20, 21 and 25 years which, to cover for inflation, incorporate rent reviews at 2, 3, 4 or 5 yearly intervals. Some leases even exist that incorporate a clause enabling the frequency of reviews to be revIewed. In 2013, new lettings in better trading position are commonly 10-15 years with 5 yearly rent reviews, and for local trader positions 2-5 years, often with break-clauses, but the unexpired duration of existing tenancies remains unchanged depending upon when the leases were granted. The consequences of the diversity is relevant when drawing comparison between what a tenant would reasonably expect in the market today compared with terms of the actual tenancy
In principle, there is nothing to prevent the parties to a lease from agreeing whatever they like but any wording or phrasing that would be contrary to law is normally subject to overriding legislation.
Despite a working system for the management of tenancies, the relationship between landlord and tenant often creates hostility, borne of mutual suspicion. Basically, the interests of landlords and tenants are diametrically opposed: invariably, the landlord wants more, the tenants less. The notion that the partIes should work together to achieve profIt, the landlord from rent, the tenant from retailing, is not prevalent In this country, so the parties seem to be at constant odds with one another. Any change in ownership of the landlord’s interest often brings new problems and a purchase during an era of high prices or interest rates adds Its own pressure by fuelling the need for full compliance and maximum rent to enhance capItal value. At rent review, the relationship between personalities is not improved by a principle in business tenancy law whereby neither the specIfIc requirements of the landlord nor the tenant’s ability to afford the market rental are relevant; in recessionary times or when the tenant’s business is not doing as well as the tenant would like, the difference in opinion or interpretation between landlord and tenant as to how a particular term or condition of the tenancy should be applied, or what the market rent should be at rent review or on lease renewal will often lead to conflict and triggering of the dispute resolution procedure.
Although rental and capital valuation is a matter of opinion, for value (of commercial property) to have efficacy it must have regard to business tenancy law. Business tenancy law composes legislation and case-law but that does not mean that the opinion of value has to agree with either the law or a precedent. A precedent may be useful but does not have to be followed slavishly. Business tenancy law is rarely concerned with wider consequences so in practice things may not work like that, because every lease and every shop property is different. Valuation is not about applying the law or a precedent literally as if the law or a precedent were indisputable, but using the law or precedent in conjunction with the art and science of the opinion. In other words, never mind the theory, a question a valuer would ask is what is the practical effect of that law on this particular set of circumstances.
With business premises, there is no standard form of lease, so the terms and conditions of each and every tenancy will vary depending upon the requirements and experience of the first landlord and first tenant and their respective advisers. Since a tenancy is often granted for a number of years, the terms and conditions, together with the wording and phrasing of those terms and conditions, will remain unchanged for the duration of the contractual term of tenancy, and sometimes beyond. The only ways any of the terms and/or conditions, the wording and/or phrasing, can be changed at any time during the term is either by rectification of a mistake (if the original parties are still involved) or by mutual agreement.
Although a tenancy can last for years, there are two relationships that can and do change. The first is the relationship between the landlord and tenant: that relationship is changeable because the superior landlord’s interest may be bought and sold or transferred and (subject to the provisions of the tenancy) the same for any intermediate landlord, and (subject to the provisions of the tenancy) the tenant’s interest may be assignable or the premises underlet.
The second is the relationship between the premises and the (open) market: that relationship is continually changing because, whereas the property (the building) is a fixed structure, the relationship between the location and position of the building and its surroundings can be affected by changes in those surroundings, and of which the landlord and/or tenant is likely to have no control.
The reason business tenancy law is a dynamic subject is that the operation and enforcement of the terms and provisions of the tenancy will depend upon the actual wording in the lease and associated documentation, regardless of what might or might not be happening in the open market. The wording and phrasing in leases is also fashionable. So, for example, if the premises were let for 25 years from 1990 with rent reviews at 5 yearly intervals, then the wording and phrasing would have been based on lease-draftsmen thinking in 1990 or before, whereas the effect of that wording and phrasing might have a different consequence at first rent review in 1995, but the consequence could be different again in 2000, and different again in 2005, and 2010 and on expiry 2015. Although words are neutral, positive and negative conniptions can be attached to their meanings and whether a word or phrase should be interpreted literally or by reference to what is known as “presumption in favour of reality” would depend upon the business tenancy law case-precedent and valuation practice at the appropriate time.
Some business tenancy law is legislation, acts of parliament, statutes, orders and regulation, but much is based on case-law: a court decision and interpretation arising out of disputes. Generally, the courts are loathe to interfere in the wording of a commercial contract, regardless of how unfair the consequences of the agreement, and tend to confine to the interpretation of the wording.
A general principle of construction that applies to all documents is that a lease must be construed as a whole and an individual clause in a lease should never be read in isolation from the rest of the lease. The interpretation of construction (wording and phrasing in documents) can be fashionable, but nowadays there is a presumption in favour of reality and commercial common/good sense.
Since the 1970s, the explosive growth of case-law has reflected the monetary effect of different interpretations by surveyors, lawyers and courts on the covenants in the lease. (In one case, the difference in opinion equated to £500,000 a year.) In 1984, in my booklet published then, I said that the variation in business leases was extensive. Then were the old ground leases from the 1880s/1890s for a term of 99 years at a fixed low ground rent, the medium to long-term leases granted during the 1920s to reflect difficulties in attracting tenants at that time, the familiar 21 year term originating in the 1950s/1960s often incorporating pre-fixed rental increases at 7 yearly intervals; and from the 1960s to 1980s, a mixture of 3, 5, 7, 9,10,12,14, 15, 20, 21 and 25 years which, to cover for inflation, incorporate rent reviews at 2, 3, 4 or 5 yearly intervals. Some leases even exist that incorporate a clause enabling the frequency of reviews to be revIewed. In 2013, new lettings in better trading position are commonly 10-15 years with 5 yearly rent reviews, and for local trader positions 2-5 years, often with break-clauses, but the unexpired duration of existing tenancies remains unchanged depending upon when the leases were granted. The consequences of the diversity is relevant when drawing comparison between what a tenant would reasonably expect in the market today compared with terms of the actual tenancy
In principle, there is nothing to prevent the parties to a lease from agreeing whatever they like but any wording or phrasing that would be contrary to law is normally subject to overriding legislation.
Despite a working system for the management of tenancies, the relationship between landlord and tenant often creates hostility, borne of mutual suspicion. Basically, the interests of landlords and tenants are diametrically opposed: invariably, the landlord wants more, the tenants less. The notion that the partIes should work together to achieve profIt, the landlord from rent, the tenant from retailing, is not prevalent In this country, so the parties seem to be at constant odds with one another. Any change in ownership of the landlord’s interest often brings new problems and a purchase during an era of high prices or interest rates adds Its own pressure by fuelling the need for full compliance and maximum rent to enhance capItal value. At rent review, the relationship between personalities is not improved by a principle in business tenancy law whereby neither the specIfIc requirements of the landlord nor the tenant’s ability to afford the market rental are relevant; in recessionary times or when the tenant’s business is not doing as well as the tenant would like, the difference in opinion or interpretation between landlord and tenant as to how a particular term or condition of the tenancy should be applied, or what the market rent should be at rent review or on lease renewal will often lead to conflict and triggering of the dispute resolution procedure.
Although rental and capital valuation is a matter of opinion, for value (of commercial property) to have efficacy it must have regard to business tenancy law. Business tenancy law composes legislation and case-law but that does not mean that the opinion of value has to agree with either the law or a precedent. A precedent may be useful but does not have to be followed slavishly. Business tenancy law is rarely concerned with wider consequences so in practice things may not work like that, because every lease and every shop property is different. Valuation is not about applying the law or a precedent literally as if the law or a precedent were indisputable, but using the law or precedent in conjunction with the art and science of the opinion. In other words, never mind the theory, a question a valuer would ask is what is the practical effect of that law on this particular set of circumstances.
Changing Market and Varying a Lease
26/September/2013
The definition of ‘lease‘ is "the grant of a right to the exclusive possession of land for a determinate term less than that which the grantor has himself in the land". In practice, a lease is a document that embodies the terms and conditions of the tenancy that are agreed between the first landlord and first tenant. How agreement is reached, whether any terms and conditions were willing, conceded or compromised, will vary depending upon the bargaining strength of the original parties.
Leases comprise 1) what would be called the principal details: for example, rent, start date, duration of term, frequency of rent review, repairing and decorating covenants, service charge if any, insurance, permitted use, alienation, break clause, and any special requirements; and 2) the ’small print’: the words and terminology, the sort of stuff that the parties often leave to their respective lawyers to agree.
The contractual term of a tenancy is often for years, and during that period of time the market for the premises and/or the style of lease is continually changing. The identity of either or both of the original parties might change, sometimes more than once, since the lease was granted. Terms and conditions may become outmoded, new legislation might have come into operation, case–law can override an intention, and different advisers analysing the terminology in the light of the prevailing market might come up with different interpretations on what was agreed by the original parties. Wording and phrasing ranges from precedent to novel as draftsmen try to be both conventional and futuristic, but frankly it is anyone’s guess how successful a lease would be at withstanding the test of time.
After completion the wording of a lease cannot be changed or varied except by mutual agreement, or rectification. Rectification is the correcting of mistakes in drafting which, judging by communications before the lease was completed, one or both parties never intended. Usually, rectification can only be done between original parties. Otherwise variation by mutual agreement occurs as a result of either the tenant or landlord requesting a change.
For the landlord, the usual reason for wanting a variation is either to maintain or enhance investment value. A product of the direction of the market, investment value is a measure of performance for the location and type of property. For the tenant wanting a variation is to do with flexibility of terms and conditions and marketability of the tenant’s business, especially when business and premises are closely bound up through having a secure lease.
All original parties may agree whatever changes they like. Problems involving variations are only likely to crop up when the tenant is an assignee in default and the landlord calls upon the original or former tenant to perform the covenants and pay the rent under privity of contract.
The variation would be recorded in a Deed of Variation or where a variation is agreed in conjunction with something else incorporated into a Licence for that other matter. Unless the first or outgoing tenant and guarantor also agree to the variation, their respective obligations under privity of contract will end on the date of variation. That may not matter if the former tenant and/or guarantor are “people of straw” but where substantial and the covenant of the former tenant is a feature of the investment, the landlord considering a request from the incumbent tenant has to weigh up the consequences of a variation, and whether the old or new rules for privity of contract would apply.
From the landlord’s perspective, to have the previous tenant still on the hook is a comfort, whether or not via an authorised guarantee agreement, (”AGA”). Outgoing tenants are not daft. Rid of the premises, they will try to arrange their financial affairs to also be rid of on–going liability. Most individuals are stuck with taking a chance. For incorporated businesses, it’s a choice between dormant, dissolution, or administration and pre–pack, and restructuring. Using dormant companies, tenants can run the business at the premises through a different company to the company in whose name the lease is vested. The consequences for the landlord’s investment are weakening: for example, any other assets of the tenant’s (old) company would be transferred to a new company, the old company’s name then changed, the new company changes its name to that of the old company, the landlord be none the wiser.
As an example of what can go wrong after a variation, recovering the full annual rent of a stepped increase in rent payable after review has been held to be unenforceable under privity where the lease makes no provision for stepped increase. In the event of a disclaimer by an assignee's administrator and claim against the original tenant under privity, I wonder whether monthly rents might not also fall foul.
Generally, rent is yearly and payable in instalments. Recent leases might incorporate provision for payment quarterly or monthly, depending upon the tenant’s preference, but where monthly rent is agreed in a side–letter, possibly also a non–transferrable personal concession, it is questionable whether the side–letter would be deemed a variation. Side–letters are useful at the time but if not properly drafted can render the entire agreement void.
Another form of variation is the confidentiality agreement. As secret documents, we are not supposed to know about them, but their use is widespread. A confidentially agreement is a side–letter for varying the lease without an overt deed of variation. A confidentiality agreement could be disclosable under certain circumstances, such as legal proceedings, but one has to remember to ask.
With short leases upon which nothing much rests or where the landlord is relieved the property is let, the consequences of a variation to the original lease are unlikely to concern. But where the value of the investment hinges upon what was agreed at the onset the consequences of a ill–thought through variation may be dire.
Leases comprise 1) what would be called the principal details: for example, rent, start date, duration of term, frequency of rent review, repairing and decorating covenants, service charge if any, insurance, permitted use, alienation, break clause, and any special requirements; and 2) the ’small print’: the words and terminology, the sort of stuff that the parties often leave to their respective lawyers to agree.
The contractual term of a tenancy is often for years, and during that period of time the market for the premises and/or the style of lease is continually changing. The identity of either or both of the original parties might change, sometimes more than once, since the lease was granted. Terms and conditions may become outmoded, new legislation might have come into operation, case–law can override an intention, and different advisers analysing the terminology in the light of the prevailing market might come up with different interpretations on what was agreed by the original parties. Wording and phrasing ranges from precedent to novel as draftsmen try to be both conventional and futuristic, but frankly it is anyone’s guess how successful a lease would be at withstanding the test of time.
After completion the wording of a lease cannot be changed or varied except by mutual agreement, or rectification. Rectification is the correcting of mistakes in drafting which, judging by communications before the lease was completed, one or both parties never intended. Usually, rectification can only be done between original parties. Otherwise variation by mutual agreement occurs as a result of either the tenant or landlord requesting a change.
For the landlord, the usual reason for wanting a variation is either to maintain or enhance investment value. A product of the direction of the market, investment value is a measure of performance for the location and type of property. For the tenant wanting a variation is to do with flexibility of terms and conditions and marketability of the tenant’s business, especially when business and premises are closely bound up through having a secure lease.
All original parties may agree whatever changes they like. Problems involving variations are only likely to crop up when the tenant is an assignee in default and the landlord calls upon the original or former tenant to perform the covenants and pay the rent under privity of contract.
The variation would be recorded in a Deed of Variation or where a variation is agreed in conjunction with something else incorporated into a Licence for that other matter. Unless the first or outgoing tenant and guarantor also agree to the variation, their respective obligations under privity of contract will end on the date of variation. That may not matter if the former tenant and/or guarantor are “people of straw” but where substantial and the covenant of the former tenant is a feature of the investment, the landlord considering a request from the incumbent tenant has to weigh up the consequences of a variation, and whether the old or new rules for privity of contract would apply.
From the landlord’s perspective, to have the previous tenant still on the hook is a comfort, whether or not via an authorised guarantee agreement, (”AGA”). Outgoing tenants are not daft. Rid of the premises, they will try to arrange their financial affairs to also be rid of on–going liability. Most individuals are stuck with taking a chance. For incorporated businesses, it’s a choice between dormant, dissolution, or administration and pre–pack, and restructuring. Using dormant companies, tenants can run the business at the premises through a different company to the company in whose name the lease is vested. The consequences for the landlord’s investment are weakening: for example, any other assets of the tenant’s (old) company would be transferred to a new company, the old company’s name then changed, the new company changes its name to that of the old company, the landlord be none the wiser.
As an example of what can go wrong after a variation, recovering the full annual rent of a stepped increase in rent payable after review has been held to be unenforceable under privity where the lease makes no provision for stepped increase. In the event of a disclaimer by an assignee's administrator and claim against the original tenant under privity, I wonder whether monthly rents might not also fall foul.
Generally, rent is yearly and payable in instalments. Recent leases might incorporate provision for payment quarterly or monthly, depending upon the tenant’s preference, but where monthly rent is agreed in a side–letter, possibly also a non–transferrable personal concession, it is questionable whether the side–letter would be deemed a variation. Side–letters are useful at the time but if not properly drafted can render the entire agreement void.
Another form of variation is the confidentiality agreement. As secret documents, we are not supposed to know about them, but their use is widespread. A confidentially agreement is a side–letter for varying the lease without an overt deed of variation. A confidentiality agreement could be disclosable under certain circumstances, such as legal proceedings, but one has to remember to ask.
With short leases upon which nothing much rests or where the landlord is relieved the property is let, the consequences of a variation to the original lease are unlikely to concern. But where the value of the investment hinges upon what was agreed at the onset the consequences of a ill–thought through variation may be dire.