Moving on and ending the relationship

18 / 01 / 2017

Often HR professionals and those in management roles are lumbered with dealing with property matters for the business. Below is the first of three articles to give you a better understanding of the issues surrounding surplus premises.

Moving on

Many companies are reviewing their staff requirements in the light of the Brexit referendum result and long term trends such as increasing automation in the workplace.  Sometimes a reduction in employee numbers goes hand in hand with a reduction in the requirement for premises – and often hard-pressed HR teams find they are dealing with lease disposals as well as redundancy programmes.

The first thing to be aware of is that, much like an employment contract, some clauses are implied by law into the landlord and tenant relationship. It’s important to read the lease and be aware of its terms, but the lease itself is not the whole story.  In particular, the Landlord and Tenant Act 1954 gives occupiers of business premises in England and Wales security of tenure unless certain procedures are followed.  If your lease is protected by the Landlord and Tenant Act you might find that the tenant company is liable to pay rent for longer than the dates specified in the lease, so it’s important to check whether this Act applies.

There are a number of possible ways of leaving premises, or reducing your occupation of them.

  • the lease comes to an end
  • the lease contains a “break” right allowing either landlord or tenant to end the lease at a certain time, which you make use of
  • you transfer your lease to another company, meaning they step into your shoes as tenant
  • you underlet your premises, or part of them, to another company

Some of these options require you (as tenant) to get landlord’s consent first.

Before diving into these, don’t forget the right to share occupation of premises with a group company.  If there’s a chain of ownership of more than 50% of the shares, the lease will often allow group companies into the same space without a lease between the two companies.  Cost sharing becomes an internal accounting exercise. More formal ways of dealing with surplus space will be considered later in the series.

The end of leases

There can be unexpected consequences of bringing leases to an end.

Most English leases oblige the tenant to hand their premises back to the landlord in good repair and condition.  This can mean giving them back in a better state than they were at the start of the lease.  The lease will often specify redecoration in the last year of the term, commonly allowing the landlord to select the colours used, requiring new carpets and for any alterations, such as partitioning, to be removed. These works are usually called “dilapidations”.

Sometimes the lease puts limits on the repairing obligations.  The lease might say that the repair should be no worse than the state recorded in a schedule of condition, usually a collection of photos taken at the start of the lease term. This is an important concession for a tenant, and the schedule of condition should be stored carefully with the other title deeds.

The works to restore the premises can be expensive and should be provided for in the tenant company’s accounts.  Often (but not invariably) the cost is negotiated between the parties, and the tenant pays the landlord money to do the relevant works after the tenant has moved out. However there are important restrictions on what the landlord can charge for, both as a result of case law and contained in the Landlord and Tenant Act 1927.

If the landlord is going to demolish the building when the lease ends, he can’t require the tenant to pay for the cost of redecorating it.  Equally if the landlord plans to improve the building over and above the standard of repair required by the tenant, the landlord can’t charge for tenant works which would be superseded by the landlord’s plans.  For example, should an external cornice be returned clean and painted, or fully restored to Victorian glory? Where there are two ways of carrying out a certain repair, the landlord can only charge for the cheaper method.  It’s a complex area so getting specialist advice is essential.

Best practice suggests that the discussions about the condition of the premises should start six months before the end of the lease. Beware of waiting for the landlord to initiate the conversation – one cost the landlord can claim for is rent for the period of time it will take for the works to be done after the lease has ended.

If you have issues around leases please do get in touch with your normal Wedlake Bell contact, or with Suzanne Gill in the Commercial Property team at sgill@wedlakebell.com.  The second article in this property focussed series will appear in the Spring 2017 edition of In Counsel.