19 / 07 / 2017
This article is the last in our series of property-focussed pieces. It highlights key points for HR and legal professionals as well as management who find themselves involved in the process of offloading premises to another company.
You can catch up with our first article which looked at moving on and ending the relationship and our second article on breaking up and the service of break notices by clicking on the links in this paragraph.
When leased premises are surplus to the company’s requirements, sometimes the lease can be transferred (“assigned”) to another company. Most leases can be transferred as long as the landlord has agreed first. The landlord’s agreement is normally recorded in a document called a licence to assign which needs to be signed by the landlord, the outgoing tenant and the incoming tenant. The landlord has to be reasonable, so if the incoming tenant company can produce audited accounts showing three or more years’ ability to pay rent, there shouldn’t be too much of an issue. The outgoing tenant will probably need to guarantee the obligations of the new tenant to the landlord. There will probably also be an agreement for sale between the old and the new tenant, with accompanying due diligence. All these documents take time to agree: three to six months is not unusual.
This can be a real challenge for HR teams if the staff working in the relevant premises don’t know the business might be leaving, or if the TUPE process must be followed. Successive inspections by parties of besuited strangers are bound to get the rumour mill going. One or two tours can be described as an insurance valuation, or a routine inspection by the landlord. Others will need to be scheduled out of hours. It might be worth considering the expense of creating a virtual reality tour for particularly sensitive situations – this technology is starting to gain traction in the commercial property market. If the closure is internally confidential, it’s important to stress this to external advisors such as lawyers and surveyors, so they know how to respond to an out of office and who to cc on emails. And bear in mind that the team who are aware of the transfer will need to grow over time, especially when you need to find someone with enough knowledge of the property to reply to the new tenant’s enquiries.
Wedlake Bell’s commercial property lawyers work very closely with our employment team and will be happy to offer advice at any stage.
Sometimes HR and legal teams find themselves tasked with overseeing the disposal of surplus premises. Below we pick out some key issues for anyone who finds themselves in that position.
The lease terms might mean that it’s hard to transfer or assign the lease as a whole. For example, the rent due under the lease might be fixed for five years – at a level which is now more than the current market rate. Or perhaps the company wants to keep some presence in the building, but doesn’t need all the space demised by the lease. This might be as a result of a redundancy programme or technological changes.
In these cases, and if the lease allows it, the premises can be underlet (sometimes called sub-letting). If a company creates an underlease, it becomes a landlord in its own right. You’ll need to have the accounts team ready to issue rent demands, remembering to do this every rent day. Service charge and insurance costs will need to be re-invoiced to the under-tenant. Passing on utilities costs can be more of a challenge if you’re only underletting part of your own space. You’ll need to consider whether it’s worth the expense of a sub-meter, which shows how much electricity has been used, or whether a “fair share” of costs is something both you and your undertenant will be happy with.
The landlord’s consent will almost certainly be needed before an underlease can be created. The lease might also specify certain terms which must be included in the underlease. Remember that if you’re dividing premises in two, you might also need landlord’s consent to the alterations. Will your reception and security staff be happy to handle the extra duties created by the undertenant’s visitors, or should you create two completely separate entrances to the two spaces? As with an assignment, we’d recommend you allow three to six months for the legal process to complete.
We hope you’ve enjoyed this series of articles about landlord and tenant issues – do let us know! There’s only been space to skim the surface of what our commercial property lawyers feel is a fascinating and complex area of law. 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.