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Friday, 9 December 2011

Leases: How to Avoid the “Term” Trap

Don’t get caught out by sloppy drafting when it comes to defining the term of a lease.

By “term” I mean the duration of the lease.

If it’s unclear how long the term is to last, the lease will be void for uncertainty where it is granted to a company or organisation.

If the lease was granted to an individual, the court might turn it into a tenancy for life at common law.

That’s what happened in the recent case Berrisford v Mexfield Housing Co-operative Ltd (Rev 1) (2011).

An occupancy agreement between a housing association and one of its members was expressed to be "from month to month until determined". The methods of termination were unclear so the agreement was not capable of being a tenancy. As a result, it was treated as a tenancy for life at common law taking effect under legislation as a 90 year lease determinable either on the tenant's death or in accordance with its express provisions (which gave the tenant the right to terminate it, but only allowed the landlord to do so in certain situations.)

That is not an outcome which either party had intended.

Another way you can get caught out by careless drafting is when you want to exclude the lease from the security of tenure provisions of the Landlord and Tenant Act 1954, which give business tenants rights to renew their lease at the end of the term.

A lease of business premises can only be excluded from security of tenure when it has been granted for a term certain.

So make sure that is what the definition of “term” says (for example “commencing on 1 December 2011 and ending on 30 November 2012”). Avoid any words which include any extension to that term, for example “and any agreed or statutory continuation or renewal of this lease”, either in the definition of “term” or anywhere else in the lease.

In the old days (when all of this was fields etc) you had to get a court order before completion to exclude a lease from security of tenure, and the eagle-eyed court clerks would usually reject the application if they saw any words that purported to extend the term beyond the contractual expiry date. Hugely annoying if you had forgotten to strike out the offending words (and likely to provoke much use anglo-saxon from irate clients), but at least it gave you the chance to get it right before completion.

Those court orders were abolished nearly 10 years ago. Now, to exclude a lease, the landlord just has to serve a notice, which must be acknowledged before completion by a declaration from the tenant. If you get the drafting wrong there is no court clerk to tell you and you run the risk of granting security of tenure when you didn’t mean to.

The consequences of getting it wrong now are likely to be more serious that a bit of verbals.

Tuesday, 6 December 2011

Your Tenant Stops Paying - Time For a Heart to Heart?

“We’re all in this together.”

Apparently.

How might that work in a landlord and tenant context?

My previous post – What Can You Do if Your Tenant Stops Paying or Goes Bust? – looked at the various legal remedies available to a landlord if its tenant stops paying the rent; either when the tenant is solvent or when it is insolvent.

I prefaced my remarks with “if you can’t reach an amicable solution” and, following some comments I have received on the post, I thought I’d look at some ways in which it might be possible for an amicable solution to be reached to help you keep your tenant and an income stream.

What you might be willing to offer will depend on your evaluation of the tenant’s financial situation.

Some possible concessions

·         Accept the rent monthly rather than quarterly. This often helps tenants manage their cash flow better and avoids the dreaded quarter day, which has forced so many retail tenants, in particular, into insolvency. Having said that, you could argue there’s nothing to stop tenants setting up their own account into which they make monthly payments and from which they could then pay the rent to the landlord quarterly.

·         Suspend the rent temporarily, to start collecting it again at a later date. This could be either a rent holiday or a rent deferral depending on the circumstances. If it is a rent holiday, you are basically letting the tenant off paying the rent for a particular period. If it is a deferral, you would be postponing the right to collect the rent until a later date, when it would be added to the ongoing rental liability. Circumstances will dictate how realistic a proposal this is, and the likelihood of the tenant ever being able to pay again.

·         Reduce the rent. Perhaps the current rent was set during the boom years and it might make financial sense for you to receive a lesser amount rather than nothing at all.

·         Defer a rent review or forego it altogether; or following a review, implement it by stepped increases rather than all at once.

·         Spread the cost of extraordinary items forming part of the service charge over as long a period as realistically possible and adhere to the principles set out in the new RICS Service Charge Code.

·         If your property is mortgaged, discuss with the mortgagee whether there are ways of helping the tenant which they would be willing to accept. They might have other ideas of their own, as it may well be in the bank’s interest to try and keep a tenant in the property.

“What’s in it for me?”

That’s a fair question. After all, you are not obliged to agree anything (although commercially it might make sense to do so). It’s a negotiation, so there may be a quid pro quo.

Perhaps the tenant will agree to give up a break clause, for example, or even extend the term. That might sound bonkers where the tenant is in difficulty, but it will test their long term view of their business.

Is the tenant able to offer any additional security in return for a reduced rent? A rent deposit is not going to be a likely option if the tenant is genuinely in financial difficulty, but they might be able to offer a guarantor.

How are concessions documented?

If it’s a simple matter, such as payment of rent monthly rather than quarterly, you might be able to do this by just entering into a straightforward side letter. The benefit of the letter should be made personal to the current tenant, so if the tenant assigns its lease to someone else, rent would be payable quarterly again unless a similar letter were given to the new tenant.

Other, more complex, concessions might require a more formal concession agreement, which again would make personal concessions to the current tenant, but would not vary the lease permanently for future tenants. You might also want to make the concessions conditional on the tenant complying with all its other obligations in the lease, so the concession can be withdrawn if it doesn’t.

As a landlord you are unlikely to want to vary the lease permanently (unless the tenant is giving up a break right), as what you are dealing with are concessions made to a particular tenant to reflect a particular set of circumstances. You will probably want anyone taking an assignment of the lease in future to adhere to the terms of the original lease.

The negotiations

Before entering into any discussions you should take advice on how best to handle any negotiations and ultimately how to document any concessions, because it is vital to avoid inadvertently waiving the right to collect any unpaid rent or any breaches of the tenant’s covenants.

You should make it clear from the outset that all discussions are on a “without prejudice” basis and are subject to entering into a side letter or concession agreement on satisfactory terms.

Of course if it turns out the tenant is simply stalling for time or negotiating in bad faith, you might ultimately have to resort to the remedies I discussed in my previous post.

The bigger picture

The case for considering concessions can seem compelling, but there is always a different view, especially when looking at the bigger picture of property investment.

Back in June in my post – Is it Time to Scrap Quarterly Rent Payments? – I noted the caution being expressed by the British Property Federation (BPF). The BPF’s director of policy Ian Fletcher was quoted in the Guardian:

"Landlords have been very flexible during the recession and saved some significant retailers from insolvency as a result...Concessions on existing leases ultimately have a cost to someone, in this case pensioners' savings in property. That is why our members feel it is better to offer help to those in need, rather than healthy businesses trying to exploit an opportunity to change their terms of trade."

However, landlords are usually pragmatic enough to accept that getting some of the money they are owed and having the property occupied is better that getting nothing and having an empty property (which soon becomes a liability because of ballooning business rates).

If concessions are given at all, they are happening on a case-by-case basis, rather than there being a wholesale change in the investment model.

Friday, 2 December 2011

What Can You Do if Your Tenant Stops Paying or Goes Bust?

These are hard times, and the light at the end of the tunnel seems to be getting dimmer and further away.

If you’re a landlord, what can you do if your tenant stops paying the rent or even goes bust?

If your tenant is still solvent but stops paying the rent (maybe it has a cash flow problem for example), most leases will give you the following options (if you can’t reach an amicable solution - and for more on that see my later post - Time For a Heart to Heart?):

·         Forfeit the lease. There’s not much point in doing this straight away unless you have someone else lined up to take the premises; after all you don’t want to end up paying empty rates. It’ll give you the premises back but it won’t give you the money you are owed. Of course, if the situation cannot be resolved, you might have to resort to this eventually, either by going to court or by “peaceable re-entry”.

·         Levy “distress” against your tenant’s goods. This is a self-help remedy that allows you (or more likely a certificated bailiff acting on your behalf) to enter the premises and seize your tenant’s goods without any legal process whatsoever, provided some  basic conditions are satisfied, and retain them until the rent arrears are paid or the seized goods are sold to off-set the rent arrears. Even the bailiff’s statutory fees are payable by the tenant. For more details here’s a post I wrote earlier this year.

·         Sue your tenant for the unpaid rent. This will only be worth doing if you think the tenant actually has the money. Or you could present the tenant with a statutory demand or winding up petition to persuade the tenant to pay or run the risk of being wound up.

You might be able to call on additional security given by your tenant when the lease was granted, such as a rent deposit or guarantee, or pursue former tenants under original tenant liability (if the lease is pre 1996) or under an authorised guarantee agreement.

What if your tenant has gone bust?

Here it gets more complicated and your advisors will need to look at the options with you carefully.

Generally speaking, the insolvency rules will often stop you taking action without the permission of the court or the consent of the insolvency practitioner.

Depending on what type of insolvency it is, you may find yourself dealing with a receiver, an administrator, a liquidator or a trustee in bankruptcy. There are different rules for each type.

Most leases will give you the right to forfeit the lease if your tenant is insolvent, but how much freedom you have to do so will be governed by the insolvency rules, again depending on what type of insolvency it is.

Perhaps your tenant has a guarantor.

Good news if the guarantor has some money; however, a recent case has shown you can’t always assume a guarantor will be dependable.

Did the guarantor clearly understand the implications (and risks) of a guarantee?

In Beardsley Theobalds Retirement Benefit Scheme v Yardley [2011] EWHC 1380 a director misled the landlord into believing that a former director of the tenant company remained on the board and was prepared to give a guarantee. The former director apparently signed the guarantee without a clear understanding of what it entailed.

The court decided that since the landlord knew of the tenant’s financial difficulties, it was only entitled to rely upon the guarantee where it had satisfied the following:

·         that the guarantor had provided the guarantee willingly;
·         an acknowledgement had been obtained from the guarantor that it had agreed to act as guarantor; and
·         it had evidence the guarantor understood the risks associated with entering into the guarantee.

These tests hadn’t been satisfied and so the Landlord wasn’t entitled to enforce the guarantee.

Take care when accepting guarantees.

Of course, the grimness of the age means it’s not just tenants who are biting the dust; landlords are too.

That’s something I looked at earlier in the year in my post What Happens if Your Landlord Goes Bust?