Renegotiating a commercial lease

A commercial lease is a rental agreement for commercial property, which could be an office, or an office building, a shop, a factory, a workshop or a studio. A commercial lease is actually a contract, and, in common with all other forms of contract, it cannot be changed unilaterally once it has been completed. However, and again like all other contracts, the terms can be changed or varied provided both parties agree to do so.

Respective rights

The relationship between commercial tenants and their landlords is almost entirely governed by the terms of the lease. In stark contrast to their residential counterparts, commercial tenants have very few statutory protections. For example, if a residential tenant fails to pay the rent, the landlord must obtain a court order in order to evict the tenant from the property. Not so with a commercial lease. If a commercial tenant fails to pay the rent for a given period, usually 14 or 21 days, then the landlord has the right to literally enter the premises and change the locks, provided he does so peaceably. This is called “forfeiture” and it brings the lease to an end. The landlord is then free to re-market the property and let it to a new tenant.

The landlord’s right to forfeit is set out in the lease, which is always drawn up by the landlord’s solicitors. It is common for the tenant to also be legally represented when the terms of the lease are being drawn up. There is often to’ing and fro’ing between the parties.

In addition to the strict rent regime, nearly all commercial leases impose maintenance, repair and upkeep obligations, called covenants, on the tenant and by which the tenant must abide at their own expense.

Despite all this, commercial tenants are not entirely without leverage, provided they are a good tenant, comply with all the covenants and pay their rent when it falls due. Tenants like this are a valuable asset and much sought-after. Hence, if a tenant is struggling, either due to specific circumstances or general market conditions, it makes no sense for a landlord to refuse a reasonable accommodation.

The alternative is for the landlord to forfeit the lease but that course of action is also risky for the landlord. First of all, once a tenant moves out, the Landlord has to pay all the outgoings on the property at a time when they are not getting any income. Secondly, letting to a new tenant can take time, depending upon prevailing conditions. It is not unheard of for a commercial property to stand empty for months or even years and every day that goes by with the property unlet means the landlord is losing money. Thirdly, a property that remains unoccupied for any extended period will tend to deteriorate and fall into disrepair. The cost of repair and refurbishment will fall on the landlord. So, while landlords do have draconian powers under the lease, they must balance these with the desire to extend some leeway to an otherwise reliable tenant who is in the throes of a financially challenging period.

It is also worth noting that landlords may have their own reasons for wanting to alter the terms of a lease. An example is when a landlord has plans to redevelop the property which is common in the world of commercial real estate. They may want to offer the tenant a reduced rent in return for the tenant agreeing to shorten the term of the lease.

Which terms are likely to be renegotiated?

Commercial leases are most likely to be renegotiated with a view to easing the situation of the tenant, albeit temporarily. So, the two most obvious terms in focus are the rent payments and the maintenance and upkeep obligations.

As far as the rent is concerned, the tenant may seek to vary the frequency of payments. It is customary in commercial rents to be paid quarterly (every three months) and tenants seeking relief may ask for the payment to be adjusted to a monthly basis. A tenant may also ask to pay a reduced rent for a given period, with the shortfall to be paid at a later date once, all things being equal, the tenant’s finances have got back on track. Another option may be a “rent holiday” for a specified period, which is to say that the landlord may agree to suspend rent payments for an agreed period, provided the tenant pays all the outstanding rate at a later agreed date.

The other onus from which a tenant may seek relief is in relation to the tenant’s obligation to maintain and repair the premises. A cooperative landlord may agree to alleviate or moderate these obligations for an agreed period or even suspend them altogether. However, regardless of the tenant’s circumstances, the landlord will require the tenant, at their own cost, to make good all dilapidations by the end of the term. Again, this is a standard requirement in nearly all commercial leases.

Do the parties need legal advice?

Both parties would undoubtedly benefit from the advice and skills of an experienced commercial property solicitor who knows how to negotiate commercial leases. Even if legal advice is not taken for the negotiations, any agreed changes must be scrupulously documented and, in this regard, both parties will need professional legal representation.

For further information and trusted legal advice regarding lease negotiations and commercial property, get in touch with us at Carlsons Solicitors.