Alienation Of A Leasehold Interest: Landlord And Tenant Perspectives

Introduction The current economic downturn, which is anticipated will continue for sometime, has created tension between landlords and tenants of commercial premises. While landlords wish to protect the value of their investment, tenants on the other hand wish to reduce their outgoings and have greater flexibility with their accommodation arrangements.

Most modern commercial leases contain restrictions preventing a tenant from assigning, sub-letting or otherwise parting with possession of a premises without a landlord's prior consent and may often contain an absolute prohibition on a partial assignment or sub-letting. Such a provision is incorporated into a lease to enable landlords to retain control over the occupier of the premises and to protect the value of their investment. In changed market circumstances this article proposes to look at the options open to a tenant who has surplus space and to look at such options from the perspective of a landlord.

Tenant's Options The various options that are available to a tenant are:

Break Option If a tenant has a break option in its lease the tenant can exercise its option to break and bring the tenancy to an end. The break option will be subject to the conditions as set out in the clause being complied with which may include the following:

6 to 12 months prior notice in writing and the notice provisions in the lease are to be strictly adhered to in this regard. The notice is served as provided in the lease, service by registered post is recommended also; payment of a penalty of approximately 6/12 months rent to the landlord prior to the date of surrender; compliance with all the covenants in the lease. Failure to do so could prevent a valid exercise of the break option; payment of all rents, outgoings, etc. to the date of the surrender; time is of the essence. Surrender In the event that there is no break option provided in the lease the tenant may attempt to negotiate a surrender of the premises to the landlord in consideration of a reverse charge premium. It is at the discretion of the landlord as to whether or not it will agree to such a surrender.

Group Companies In the event that the tenant has the option to group share it may avail of such an option in order to assist with the payment of the rent subject to the conditions as set out in the clause being complied with which may include the prior renunciation in writing of the group or associate company of its right to renew.

Pre-Emption Clause In the event that there is a pre-emption clause in the lease in favour of the landlord the tenant will be in a position to notify the landlord in accordance with the provisions in the lease of its intention to assign the lease providing the landlord with the right to match a third party offer.

Assignment An assignment involves an out and out transfer of the interest of the tenant. An assignment transfers the tenancy to the assignee and the tenant ceases to have any interest in the premises. The assignee steps into its shoes and assumes all the rights and liabilities of the tenancy for as long as it holds it. The tenant will have no liability going forward under the lease provided that it has completed all the necessary formalities.

Sub-Lease The crucial point in a sub-letting is that the tenant retains its interest in the premises and remains liable to the landlord on the terms under the head lease. Unlike an assignee of the tenant, a sub-tenant has no privity of estate with the landlord. The head lease will specify that the rent in the sub-lease is either the open market rent or equivalent to the rent passing under the head lease for the time being whichever is the greater. Given the current economic climate such a provision may prove to be an obstacle to the tenant as it can only sub-let at the higher rent. When negotiating a lease this is a provision that the tenant should carefully consider.

Unsuitable market conditions which render sub-letting problematic do not relieve the tenant from having to comply with the...