2 October 2009 by

If only

With Land Securities (a major commercial property investment company) recently reporting that the number of its retail tenants in administration doubled between September 2008 and the start of this year, what issues should you consider when you don’t have the wherewithall to take a hit of this nature.

Some tips are:-

Know your building and the actual occupier. Obvious though this sounds, ensure that all your records are up to date. Has your tenant defaulted and sublet? If so you could use a procedure to require subtenants to pay rent directly to you.

Is the lease an old or new lease for the purposes of the Landlord and Tenant Act 1995? This will determine whether and how many previous tenants are liable for rent if the existing tenant fails to pay. Are any guarantors still liable? Whichever type of lease exists to be able to recover rent from guarantors certain notices must be served within 6 months of arrears of rent arising.

What must you consider if your tenant requests a surrender? You should consider VAT and stamp duty implications and ensure that these are factored into the premium to be paid. The proposed premium may seem ideal but in reality may not be worth entering into.

Understand the landlord/tenant relationship. If a landlord forfeits a tenant’s lease, any sublease will also come to an end even if granted with the landlord’s consent. (It is, however, open to a subtenant to apply for a vesting order i.e. for a new lease to be granted direct to the subtenant by the landlord for the remainder of the term of the sublease.)

Subleases survive a surrender which is great news for a landlord if the surrender premium is paid in addition to the subtenant’s rent payments but less so if the vacant possession value is greater.

Know your lease. Where rents are falling, landlords will no doubt decide not to initiate a rent review. Some clauses provide that if the process is not commenced within a certain period of time the right to review the rent is lost.

A tenant’s right to break may also be linked to a rent review date. A landlord must still follow the procedure set out in the lease carefully, failing which if the tenant does not exercise the break right the landlord may have lost the right to review the rent.

Was a tenant’s break right properly exercised? Most leases contain preconditions that must be complied with by the tenant either at the time of the service of the break notice or the break date for the break to be effective. A landlord should consider these carefully.

Examples of preconditions are material compliance with all leasehold covenants (including repair and decoration) as well as payment of all rents. If these preconditions are not complied with a break notice can be invalid which places a landlord in a strong position either in holding the tenant to the lease for the remainder of the term or in negotiating a surrender.

Be careful of empty rates and increases. Business rates increase by reference to the inflation levels of the previous September (5.5.% in September 2008.) Landlords are now obliged to pay full rates for offices and shops after three months and six months for warehouses. In a difficult reletting market this is a significant burden and this should be considered at the outset of tenant negotiations.

For advice on commercial property call on 020 7288 4700 or email info@boltburdon.co.uk

23 October 2009 by Yezdan Izzet

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