How can commercial tenants reduce business space?

In response to COVID-19 and the near-universal switch to home-working, many commercial tenants have revised previously held assumptions about the amount of business space they actually require. This article looks at the options available to commercial tenants looking to reduce business space.

Early Termination

If a tenant’s commercial lease includes a right to early termination (known as a “break clause”), then exercising this right may be the simplest and most preferable option (subject to a serious evaluation of the business’s likely short and long-term business space needs and other commercial considerations). Whether or not the tenant is entitled to serve a break notice (and, indeed, how that notice is to be served) will depend on the specific terms of the break clause as provided in the lease. Service of an invalid break notice could result in the tenant losing their right to break and remaining tied to the property long-term, so it is crucial that a tenant seeks expert legal advice before triggering a break clause.

In the absence of a break clause, it is unlikely that a tenant will be in a position to bring about an early termination of their lease. A tenant might be able to rely on a force majeure clause (which allows early termination in certain unforeseen circumstances), but most leases do not include a force majeure clause and the COVID-19 pandemic is probably not an event that would trigger such a clause in any case.

A tenant could conceivably “surrender” the lease early, but practically-speaking a landlord is unlikely to consent to this – as is required by the law of surrender – unless the landlord can make better use of their premises without the tenant in occupation.

Assignment/Sub-letting

Alternatively, the tenant could assign (ie. sell) or sub-let their lease. Under a sub-letting, the tenant could grant to the sub-tenant all or part of the premises demised under the lease.

This option is subject to the qualification that the tenant’s lease may prohibit an assignment or the granting of an underlease, although some landlords are recognising that commercial sense in consenting to an assignment/sub-letting (particularly where the tenant no longer wants use of the premises). Where a lease does allow assignments or sub-lettings, most require that the landlord does not unreasonably withhold consent to a tenant’s request to assign/sub-let.

Of course, finding a suitable assignee or sub-tenant at an agreeable price may be difficult in a market that is experiencing reduced demand for business space.

Re-gearing

It is quite possible that a landlord would be open to renegotiating the terms of the lease – a process known as “re-gearing”. Depending ultimately on the negotiating parties’ respective positions, the landlord may be open to allowing the tenant to let a smaller space than under the original demise or even relocate to alternative premises within the same building/estate.

Where a tenant enjoys the benefit of a break clause, the landlord obviously has more incentive to agree to a variation of the lease. However, many break clauses are time-limited (eg. the right to early termination expires on a particular date) so a tenant must ensure that they leave sufficient time to reach an agreement and settle the necessary legal formalities – a process than can take several weeks to conclude.

Contact our Real Estate Dispute Resolution  team today

If you would like to discuss any issue relating to this blog, please do not hesitate to contact a member of the Real Estate Dispute Resolution Team on 01895 207835 or 01895 207295, or email us at propertydisputes@ibblaw.co.uk