During the Covid crisis, many businesses started looking at their commercial property requirements and how these have changed. The impact of flexible working and many meetings now taking place virtually rather than face to face means that many companies require less office space, and some can even operate remotely.
With the recent economic turmoil, many businesses will also be considering ways to reduce their outgoings, one of the biggest of which is rent. We have set out below different options for companies looking to downsize their leased office space.
The first option is to sublet part or the whole of your office space. You need to check the terms of your lease to see whether subletting is permitted and the conditions. Most commercial leases will permit the tenant to grant an underlease of whole. Some leases may also permit underleases of part of the property, usually only if the spaces can be split into separate self-contained spaces. You would also need your landlord’s consent to the subletting (usually, they can’t unreasonably withhold consent).
Subletting is a good option if you want more flexibility in the short term; for example, you could grant a sublease shorter than the main lease and see whether you want to renew the sublease when it comes to an end or use the space yourself again. There are downsides to subletting, however. The tenant in the original lease will still be on the hook to pay the rent to the landlord. In practice, they will pass up the rent they receive from the subtenant, but they will not be released from complying with the tenant covenants.
There are a couple of ways that you can end your lease early if you no longer need the property. The first is to agree on a deed of surrender of the lease with the landlord, which is at the landlord’s discretion, so they do not have to agree. The landlord would usually ask for a premium if they do agree to surrender as compensation for the lease ending early, and they may have other conditions, for example, carrying out certain dilapidation works at the property.
You may exercise a right to break the lease if one is included. A break lease is a contractual right to bring the lease to an end, usually on a certain date. The lease will indicate how much notice you have to give the landlord and the conditions for exercising the break. It is very important that the break notice is served on the landlord correctly and all of the conditions are complied with; otherwise, the break right will not take effect, and the lease will not end on the break date. Our Property Litigation team recently published a blog with more details about break rights for further details.
The final option is to assign your lease to a third party, which will, of course, depend on you being able to find a third party who wants to take on your lease, which could be more difficult in the current climate. It will also be subject to the provisions in your lease and subject to the landlord’s approval (which usually can’t be unreasonably withheld).
Assignment clauses in commercial leases will often contain a provision which states that the landlord can refuse consent if they think the incoming tenant is not of sufficient financial standing to comply with the covenants in the lease. The provision is something to bear when searching for a third party to take the lease on.
Most leases will require the outgoing tenant to provide an authorised guarantee agreement, which guarantees the incoming tenant’s obligations. You will not be released from future liability under the lease. For example, you may be called on to cover the arrears of the new tenant if they are in default.
As seen above, there are multiple ways that you can reduce or offload any surplus office space. They all have benefits and drawbacks and the best option for a particular business will depend on the circumstances. For more information, contact our Commercial Property Lawyers on:
