Downturn creativity for landlords

In the present economic climate, its no surprise that more tenants are defaulting or using break rights to terminate their leases. Firms in difficulty will try to restructure in order to salvage the remains of a good business rather than sink without trace. To avoid being left with expensive, empty properties, landlords may need to adopt a more creative approach. Willans offers commercial landlords some ideas to consider.

• With pre-pack administrations now in common use, be prepared to negotiate with administrators and new companies. Also assess whether a tenant’s situation is temporary or terminal and the cost implications to you of having an empty property if the lease is forfeited.
• When an insolvent tenant could no longer pay the rent, traditionally the landlord would forfeit the lease. But when new tenants are scarce, you could be left paying insurance and business rates on an empty building—plus potentially the cost of any vandalism, squatters or security. By keeping the lease in place and negotiating a reduced rent or rent-free period, the tenant will be obliged to pay for all other outgoings relating to the property and to keep it secure and in a good state of repair.
• Any revised rent payment terms should be for a definite period of time and should be agreed in writing. It should be made clear that you are not waiving your right to forfeit the lease in general, and also that you have full rights to forfeit if the tenant breaches the revised agreement.
• If you or your managing agents discover that the tenant has breached the lease, do not send any rent demands or accept any payment of rent (even if they relate to a period before the breach occurred) until the new revised agreement is put in place.
• It is important that you don’t inadvertently lose your rights and remedies under the lease (including forfeiture) as these may give you a stronger negotiating position, either with the tenant or any insolvency practitioner who subsequently becomes involved.
• Instead of offering a rent reduction or rent-free period, particularly to tenants in the retail sector, you might vary the rent arrangements in the lease by linking the payment of rent to the turnover of the business. The rent will automatically reduce when business is slow, but rise when turnover goes up: thereby benefiting both parties. There are various ways of calculating a turnover rent, and we are happy to advise on these.

Plainly, it is vital that landlords manage their properties proactively and keep in touch with their tenants. At the first sign of trouble, the landlord is then in a position to act swiftly to reach a mutually beneficial agreement without compromising his own ability to take back the property if necessary.

If you need clear and pragmatic legal advice, we’re here to help so please get in touch.

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