REAL ESTATE

The Leasehold Tug-of-War

I suspect for many business people a lease is no more than a boring, complicated document for solicitors to pore over and then store in their dusty strong rooms. With hindsight however, many landlords and tenants may wish they had paid more attention, particularly as a result of the economic turbulence of recent years.

 

Casualties on the high street, including household names such as Woolworths and JJB Sports, fell into administration at least in part due to unsustainable rents agreed in the boom years. With the ability to discard entire shops and renegotiate leases at lower rents, administrators proved that some retail brands could continue to be viable with essentially the same business from the same location but at a lower rent.

The negotiation of a lease could be viewed as a commercial game of tug of war with landlords and tenants each trying to negotiate terms most favourable to their business. A recession can however act as an extra man on the tenant’s tug of war team meaning tenants can negotiate better terms on key points than they could have done previously.

So what key points am I talking about?

Rent

This is a no brainer. The landlord wants the rent to be as high as possible and the tenant wants it to be as low as possible. For a lease of say 10 or 15 years, it would be normal to have rent reviews every five years. A variety of rent review mechanisms exist, such as reviews to reflect increases in the retail prices index or to reflect changes in rents payable in the open market.

Length of Lease

It may suit a retailer with multiple outlets to take leases in blocks of five years ie leases for 5, 10 or 15 years. If however you are setting up a new business it rarely makes sense to sign up for an extended period of time as the new business may be untested and may or may not ultimately thrive or succeed. Any such lease is likely to require a personal commitment which can have devastating financial consequences if the business does not survive.

Often the reason given for a longer lease is that the business start-up wishes to secure the premises going forward. In most cases this is unnecessary as in broad terms the Business Tenancies (Northern Ireland) Order 1996 makes a presumption that a business tenant has a right to a new lease from its landlord.