Shop leases – negotiating points when it all goes wrong

Walking down your local High Street can be quite depressing these days – in our local area, Edgware, in North West London, I can remember the days when it was almost impossible to lease a shop and where leases did become available, the tenant would normally need to pay a hefty premium. Even though our

Home » James Swede » Shop leases – negotiating points when it all goes wrong

Walking down your local High Street can be quite depressing these days – in our local area, Edgware, in North West London, I can remember the days when it was almost impossible to lease a shop and where leases did become available, the tenant would normally need to pay a hefty premium.

Even though our area remains relatively affluent, many shops become unoccupied with alarming regularity, and the ones that don’t, tend to be the big coffee outlets (you know who), banks and pound shops.

With The Telegraph reporting earlier this year that some 50% of High street shops are under threat of closure, this raises significant legal issues. This means a lot of shops with current tenants and leases, with many shop leases being lengthy fixed terms and occupied by small businesses.

So, what are the legal issues and dynamics, from both the Landlord & Tenant perspective ?

Shop lease – the negotiating position and legal options

With the chances of succeeding with a retail operation from a shop diminished, and so many shops becoming available, if you are considering entering into a new lease, your position should be stronger. We would strongly recommend that you set up a limited company if you haven’t already and seek to enter into any commercial lease as that entity. Personal liability should be avoided. When things were better for Landlords, when dealing with a small or recently established company, the Landlord would almost certainly require a personal guarantee. In the current environment, we would strongly advise a tenant to refuse this wherever possible and as a compromise, perhaps offer a larger rent deposit, perhaps 6 months maximum.

If you are already a tenant of a shop lease and your business is in difficulty, there may be a number of options, including

If your business operates as a limited company and you have given no guarantee, to simply leave the shop

As lawyers, we advise our clients to act lawfully, so this is not something we expressly recommend, but it does happen in practice all the time. The risk of doing this is that your company may be liquidated but perhaps more so, you may gain a bad reputation for the future. If you only leave when your company is already clearly insolvent, an aggrieved Landlord or other creditor might consider pushing for action against directors of your company based on wrongful trading.

You are personally liable, either having contracted personally (or in a partnership) as tenant or have given a personal guarantee

In this situation, you obviously have a major problem. If you simply leave, you are potentially exposing yourself to a claim for the rent due for the balance of the fixed term and possibly other consequential damages. With a fixed term lease, there is, on the face of it, no duty for the Landlord to seek to mitigate loss by finding a new tenant. As against that, if the Landlord knows that you don’t have money or assets, it is not in the Landlords interests to adopt that approach. The potential alternatives in this situation are instead to :-

Try and negotiate a surrender of the lease with the Landlord – if you can agree a surrender, your liability will then terminate, but the Landlord may well drive  hard bargain, and require a reverse premium, especially given that if the Landlord finds it hard to find a new tenant, he, she or they will be liable still to pay business rates even if the property is empty.

Try to find another tenant to take over the lease, by taking an assignment – in this situation, you again may need to pay a reverse premium to the new tenant and also face the stress and rigmarole, with most leases, of needing to get the Landlord’s licence to assign. Another potential drawback to this option is that most leases require an outgoing tenant to enter into an Authorised Guarantee Agreement, which means that you will still be liable to the Landlord if the replacement tenant defaults. Given how many tenants are defaulting with shop leases, there will generally still be a significant risk.

Seek to negotiate a reduced rent or otherwise vary the lease

jamesThis may be an option if you are struggling to pay the rent but your business may still be viable. Much will depend on other factors, as described above, and you may take the view that things are so bad on your High Street that the Landlord will struggle to relet the shop and so he, she or they will not want to pay business rates with an empty property. You may be able to negotiate a much lower interim or long term rent, possibly to shorten the remaining term of the lease or even a payment holiday, as long as you pay the business rates.

 If you need help or advice on any of the issues raised above, don’t hesitate to get in touch. I advise many Landlords and Tenants in these types of situations. 

More here on the site also about commercial leases.

James Swede • Property law

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