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Business and Company Law

Commercial Leases and the COVID-19/Coronavirus-the Fallout for Small Business Owners

rent-review-commercial leases

I was contacted last week by a couple of clients whose business has gone through the floor or evaporated entirely as a consequence of COVID-19.

One of the first concerns they had was the difficulty they were inevitably going to encounter in trying to continue to pay the rent on their commercial premises. Here are some questions that spring to mind.

Must I keep paying rent?

It is almost certain that there would be no entitlement to cease paying rent. From a legal perspective the lease will contain an obligation to pay rent and you will be in breach of that covenant if you fail or refuse to do so.

If you did stop, you are leaving yourself open to the landlord taking matters further. Courses of action open to her would include commencing legal proceedings to recover the arrears and/or to forfeit the lease and recover possession of the premises. If you had paid a rent deposit this would obviously at risk and if there was a guarantee for the rent, the guarantor could expect to hear from the landlord who will try to enforce his guarantee.

Can I terminate the lease or just hand it back?

No, you could only do so with the consent of the landlord. This assumes that there is no break clause option in the lease.

Fundamentally, once you enlist you must soldier-that is to say, when you signed up to the lease you signed up to various terms and conditions and covenants and it is unlikely that the COVID-19 catastrophe will allow you to walk away from those obligations.

A force majeure event may allow this to happen, but COVID-19 is almost certainly not going to be held to be such an event.

Can I claim off my insurance policy?

You need to review the terms and cover provided by your policy. It may be possible to claim for losses arising from COVID-19 but, quite frankly, when you are scouring through an insurance policy looking for a term or condition to favour you it will probably be a futile exercise.

Can the landlord close my premises?

This is a tricky one and will depend on the premises and where it is located. If, for example, the premises were in a shopping centre and the landlord decided to close the whole centre you may be able to argue that the landlord has torn up the lease.

You would have a harder time with that argument, however, if the landlord was following directions of the government or medical advice.

Can I suspend payment of rent?

There may be provision in the lease for the suspension of rent, but this is likely to apply if the building was destroyed or damaged by lightning or some such similar catastrophe. Otherwise it is unlikely that the normal rent suspension provisions which might be found in a commercial lease would apply.

The bottom line

The terms, covenants, and conditions in your commercial lease apply from day 1 and even though COVID-19 is an appalling vista for any small business owner the law will not come to your rescue and you are stuck with the provisions of the lease. You are reliant on the generosity, decency, and common sense of your landlord.

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Business and Company Law Property Law Start Your Own Business

Why Reviewing a Commercial Lease Alone is Of Limited Value

I am often asked by budding entrepreneurs to review the lease of a commercial premises which is part of a small business they are considering purchasing.

The entrepreneur, understandably, is trying to avoid as much avoidable expenditure as possible and wants the lease reviewed for a competitive fee.

I can do that, of course, without any difficulty but I have to explain that reviewing the lease alone is of extremely limited value.

Because most commercial leases emanate from a standard template or precedent lease which is widely used and accepted by solicitors in Ireland. Therefore any difficulties in the proposed acquisition of the business and taking on of the lease are unlikely to be contained within the terms, covenants, and conditions of the lease which are similar across commercial leases.

What are the dangers?

Potential problems are more likely to appear in relation to other issues outside the lease, issues like

  • Title-is there good legal title to the lease? Was the granting of the lease in the first instance in order?
  • Planning-are there any planning issues arising from the use of the premises? And any development carried out over the years, development that would have required planning permission?
  • Is the premises being used for a use permitted by the lease?
  • Rates/charges-are there any issues in respect of rates or other charges that may attach to the premises and is there any arrears for which the new occupant may become liable?
  • Is there a management company? Are there outstanding charges?
  • What condition is the premises in?
  • Are there any issues likely to arise from a fire safety perspective?
  • If the business is involved in food preparation and sales are the necessary plumbing, electrical, food preparation, refrigeration issues compliant with building regulations and any applicable food regulations?

If you are considering taking on a business in which there is a leased premises you are taking an avoidable, critical risk by not having all aspects of the lease assignment investigated.

This involves pre-lease enquiries about title, planning, rates, and so forth being properly investigated. None of these issues will be dealt with by a review of the lease alone.

Yes, it will cost you more money.

Yes, there may be no further issues.

But checking the lease on its own is of extremely limited value and if your finances cannot stretch to having the transaction carried out property, with the necessary checks and pre-lease enquiries carried out, you should seriously consider your investment.

Because you cannot afford it. You are too early and it is premature.

You might be as well going to a casino and putting all your money on red, or black.

Because the likelihood is that any problems that arise from your purchase of the business will not necessarily be contained in your lease, they will probably lie elsewhere, outside the 4 walls of the lease itself.

 

Categories
Property Law

Assignment and Sub-Letting of Commercial Premises

 

assignment subletting commercial premises

Do you hold a lease on a commercial premises?

Do you want to sub-let it? Or assign (transfer) it to someone else?

You may run into difficulties with your landlord, though.

Let’s take a look at the issues.

Most leases will have a restriction on alienation-assignment or sub-letting- contained in the lease. This is to allow the landlord to protect his investment by ensuring that the quality of his tenant is high.

Because any tenant can ultimately obtain security of tenure in the premises. And if he is a poor tenant and the landlord is forced to enforce the covenants in the lease it is going to cost time, money, inconvenience, and possible diminish the value of the landlord’s property.

However, the landlord will also need to consider how restrictive the alienation clause is, because if it is unduly restrictive it will have an adverse effect on the rent he can achieve. Quite frankly, less tenants will be prepared to take it on if they think that they cannot assign or sub-let it in the future, if necessary.

The tenant will need to consider his business, how restrictive the covenant is, and the premises itself.

Restrictions on Alienation

All commercial leases will contain a restriction on the assignment or sub-letting of the premises without the landlord’s consent, and an absolute prohibition on letting part of the premises.

Put simply, the landlord is entitled to ensure the property is not handed over to an undesirable who will devalue the landlord’s property.

However, the landlord is not entitled to unreasonably withhold his consent to alienation. The question of what is “reasonable” is a thorny one, though.

There is no statutory definition of a reasonable refusal, therefore it is a question of fact and circumstances in each particular case. If a tenant is not happy with the landlord’s decision, he can go to Court to seek a declaration that the consent is being withheld unreasonably and allowing the assignment/sub-letting to go ahead without the consent.

The case of International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] provides a good summary of the principles to apply in determining whether the landlord’s consent has been unreasonably withheld or not.

Many leases will also contain a pre-emption clause. This gives the landlord first refusal on any assignment.

He may also have the right to match any 3rd party offer.

Break Clauses

Tenants will look for a break clause in the lease. This will allow for circumstances changing in the future.

Generally, the breaks clause would be exercisable at the time of the 1st rent review, but this is entirely a matter for negotiation between the parties at the outset.

Most break clauses will only be exercisable when the tenant has complied with all provisions in the lease.

Assignment of Lease

The existing tenant must ensure appropriate references-trade and bank-are obtained and submitted to the landlord, along with the request for consent to assign.

The existing tenant will also have to be released from his personal guarantee, if he has given one.

The new tenant’s solicitor must make the usual conveyancing enquires about title, planning permission, mortgage on the property, and the usual pre-lease enquiries.

Service charges, and any other annual charges, will have to be apportioned between new and existing tenant.

The landlord, and his solicitor, will be anxious to ensure that the new assignee is as satisfactory as the existing one.

Sub-Letting

The existing tenant will be the landlord for the sub-tenant and he will be granting a sub-lease to the sub-tenant. He will need to get references from the sub-tenant to give to the head landlord, and apply for the head landlord’s consent to the sub-letting.

The sub-tenant, in addition to ensuring the proposed sub-lease is satisfactory, will need to ensure that the head landlord’s consent is given for the sub-letting.

The head landlord’s position is not affected from a legal perspective as he will still have his original tenant on the hook as that tenant will remain contractually liable to the landlord.

Partial Assignment or Sub-Letting

Most modern commercial leases will prohibit partial assignment or sub-letting.

Conclusion

Hopefully, you will see from the above that entering into a lease can be a complex matter which should not be undertaken without professional advice.

Quite frankly, it is easy to sign on the dotted line of a commercial agreement. Especially when you are starting a new business about which you are understandably excited.

But it is foolish to do so when you run the risk of running into costly difficulties later on, and find that you cannot assign or sub-let or you are staring at an eye watering rent increase through the rent review.

 

Categories
Property Law

Rent Reviews in Commercial Leases-What You Ought to Know

rent-reviews-commercial-lease

Do you occupy a retail, industrial, or office premises?

If you do you will probably have you a commercial lease?

If you have, it will almost certainly provide for a rent review.

And you could be in for a very nasty shock.

Let me explain.

Over the last few years, since the property crash at the end of the Celtic Tiger years, quite a few commercial property owners were just happy to get their commercial premises let.

Any rent is better than an empty commercial unit or office.

Many of the leases granted then were on initially favourable terms for tenants, simply to get them let.

However, many of these leases are coming up to their first rent review, typically 5 years after commencement. The big problem for small business owners is that these rent reviews provide for “market rental value” which is causing a nasty shock, and in some cases unaffordable rents, for small business owners.

Because in some cases they are seeing their rents double, or more.

What is the legal position?

Is there anything you can do about it?

How does a rent review work?

Let’s take a look.

The purpose of a rent review clause is

  1. to protect the value of the landlord’s property
  2. to reflect the changing value of the property during the term of the lease.

What will normally happen is the landlord will serve a notice on the tenant seeking a significantly higher rent. Generally, time is not of the essence in relation to the service of notices by either landlord or tenant.

The tenant should then write back indicating his disagreement and asking what is the basis for the figure sought, and how was it arrived at.

Landlord and tenant will then instruct representatives such as valuers/surveyors/auctioneers to engage with the other side and attempt to agree the new rent.

Reviewing the Rent

The rent review clause will normally provide for the rent to be reviewed by an independent expert if the landlord and tenant cannot agree on the new rent. This independent expert will either act as an arbitrator or expert; in practice, the difference is not hugely significant.

Generally, the appointment of the expert will be the prerogative of the landlord if the landlord and tenant cannot agree on who to appoint.

If the landlord fails to make the nomination the tenant may be able to nominate, or the rent review clause may provide for appointment by the President of a professional body such as the Law Society or the professional bodies for Chartered Surveyors or Auctioneers/Valuers.

If there is a delay in agreeing the rent the tenant will be liable for the back-dated rent, plus interest at a “base rate” provided for in the lease.

The basis for reviewing the rent will almost certainly be to “current market rent” or “market rent”.

Up to the passing of the Land and Conveyancing Law Reform Act, 2009 rent review clauses provided for “upward only” rent changes.

However section 132 outlawed “upward only” rent reviews in leases created after 28th February, 2010.

Therefore, it is possible, albeit unlikely, that the rent can be decreased to reflect market value. This was never the case with leases before the passing of the 2009 Act.

The critical date is 28th February, 2010; leases before this date can have “upward only” rent review clauses. After this date such clauses are of no effect.

Assumptions and Disregards

The basis on which the new rent will be determined will be on the basis of certain assumptions and disregards:

  1. that the premises will be let as a whole
  2. what it would fetch on a free and open market
  3. with vacant possession, that is, as if the premises was being let with full vacant possession as it was at the granting of the lease
  4. for a term of the greater of 15 years or the residue of the lease
  5. on the same terms and conditions as the present lease, including with a rent review clause
  6. that the tenant has fulfilled all his repairing and decorating obligations as provided in the lease, and has fulfilled all covenants in the lease
  7. no work has been carried out on the premises that diminishes its rental value.

Also, the following will be disregarded:

  1. any effect on the rent of the fact that the tenant has been in occupation and disregarding any goodwill he has built up and is attaching to the premises
  2. any effect of improvements or works carried out on the premises by the tenant.

In summary, the lease to be valued at rent review time is a hypothetical lease identical to the existing lease so that the rent will be calculated on the same basis as the existing lease.

Conclusion

Leases can be confusing, technical documents which require careful drafting and interpretation. Mistakes and oversights can be made in drafting them, including in relation to the rent review clause.

If you are facing an eye-watering increase in your rent on foot of a rent review it would probably make sense to have your solicitor take a close look at the lease.

Categories
Property Law

Termination of Commercial Leases and the Right to a New Lease-the Essentials

leases-property-law

Are you a landlord or tenant of a commercial lease?

Do you want to terminate a commercial letting agreement?

Or perhaps you want to lawfully lay claim to a new lease?

This piece aims to give you a good handle on what’s involved.

Termination of a Commercial Letting Agreement

The most common ways to terminate or end a commercial ease are

1) Notice to quit

2) Forfeiture.

Since the Residential Tenancies Act, 2004 lays down the procedure for the vast majority of residential tenancies Notice to Quit and Forfeiture now only apply to commercial tenancies.

You only use a Notice to Quit procedure where the tenant remains in possession after the expiry of the agreed term and continues to pay rent. This tenant is said to be overholding.

Where the landlord wishes to end the tenancy prior to the end of the agreed term, the appropriate procedure is Forfeiture.

Notice to Quit

Notice to quit is the most common procedure to recover the premises where the tenant is overholding, that is the term of the lease has ended.

Anybody who has received prior express authorisation may serve the notice to quit.

Where the landlord is not serving the notice to quit himself it is prudent to arrange prior written authority to be given to the server. This authority can not be given retrospectively.

There is no set form for the notice to quit but it must contain a clear and unambiguous intention to end the tenancy.

A description of the premises must be given and it must be addressed to ‘the tenant and all other persons in occupation’.

It need not be signed but it is prudent to do so.

Length of Notice

Firstly check the written agreement to see is there an agreed procedure. If not the statutory minimum is 4 weeks and the notice must end on a gale day(this is the point when one period ends and another begins).

The crucial question is how is the rent reserved in the lease (this is not the same as how is the rent paid).

A monthly tenancy requires one month’s notice expiring on a gale day.

A quarterly tenancy requires 3 months notice and this should expire on a gale day.

A tenancy from year to year requires 183 days notice expiring on the anniversary of the tenancy.

Personal service is best and in the case of a limited company on the registered office of the company.

Waiver of notice

You will be deemed to have waived the notice to quit if you

  • Serve another notice
  • Demand the rent
  • Accept the rent which falls due after the end of the notice period.

Landlords are advised therefore not to accept rent after the end of the notice to quit has expired.

Care should be taken to check the lease to see if any provision has been made for a specific method of terminating the tenancy.

Forfeiture

This is only appropriate where the term of the lease is still running. But a landlord has no right to terminate a lease prematurely unless the tenant has been in breach of one or more of it’s terms.

A landlord also loses the right to forfeiture if he does not follow certain statutory procedures which give the tenant a reasonable opportunity to remedy any breach.

It is extremely difficult in practice to forfeit a lease, especially if the parties are in court for the first time.

Grounds for forfeiture

The 3 main grounds for forfeiture are

1) Disclaimer by the tenant of the landlord’s title;

2) Re-entry or ejectment where there has been a breach of a condition in the lease;

3) Re-entry or ejectment where there has been a breach of a covenant which provides for re-entry for that breach.

Breach of condition of lease

Breach of a condition of a lease gives the landlord an inherent right to re-enter.

But the landlord must be careful to distinguish between a condition and a covenant.

Breach of covenant in a lease

A breach of covenant in a lease will only give rise to a right to re-enter if the covenant broken also has a proviso for re-entry in the lease.

Before forfeiture can take place a ‘section 14’ notice must be served unless forfeiture is occurring for non payment of rent. In this case there is strictly no need for a ‘section 14’ notice, but it is probably advisable to serve one.

This notice calls upon the tenant to remedy the breach within a reasonable time.

Peaceable re-entry

If the notice is served and the time specified in the notice has elapsed without the remedy of the breach, a demand is again made for possession and the landlord may re-enter if it can be done without the use of force. There is a statutory prohibition on the use of force.

If peaceable re-entry is carried out, and this is difficult, the landlord should make a detailed inventory of property, possessions/stock on the premises and write to the tenant telling him how he can retrieve them, and what will happen if he doesn’t.

Ejectment civil bill on title

If the landlord can not re-enter peaceably the landlord’s remedy is to issue an ejectment civil bill and seek an order for possession in court. If re-entry cannot be carried out peaceably the landlord cannot use force.

Relief against forfeiture

There are 2 reliefs for the tenant to prevent forfeiture of the lease-statutory and equitable.

Statutory

Section 14(2) Conveyancing Act 1881 allows the tenant to apply to court for relief-it is then at the discretion of the court and there are no fixed rules for the court in exercising its discretion.(Much of the Conveyance Act, 1881 has been repealed by the LAND AND CONVEYANCING LAW REFORM ACT 2009 but this relief has not been repealed).

A sub-lessee will get statutory relief and his sub-lease will continue as if the superior landlord was the immediate lessor.

The Landlord and Tenant(Ground Rents) Act 1978 provides that forfeiture can not occur by reason of failure to pay ground rent in the case of a house where the tenant is entitled to buy out the freehold.

In general there is no statutory relief where the landlord forfeits the lease for non-payment of rent.

Equitable

Courts may use its equitable discretion to grant relief to the tenant, even for non-payment of rent, if it would appear to be just to do so.

Courts lean against forfeiture for non payment of rent and tend to give tenant’s plenty of opportunity to pay up. But it will look at the conduct of the parties prior to going to court.

Other Forms of Termination

The list below is not exhaustive:

Effluxion of time

Where the term of a lease is up there is no need to serve a notice. A letter prior prior to the end of term pointing up the end of the term and demanding possession will suffice.

Merger

A lease may end when the interest of the landlord and tenant become vested in the one person in the same right.

Court Order

The court has jurisdiction under certain legislation to terminate a tenancy.

Exercise of an option (break clauses) in a lease

Commercial leases often have break clauses entitling either party to terminate prematurely.

Legal proceedings

It may still prove necessary to go to court,even after ending the lease by one of the methods outlined above.

Ejectment Civil Bill on Title Based on Forfeiture

The landlord’s claim is based on the fact that the tenancy has ended by forfeiture and the tenant has no right to retain possession. This is a very common procedure, especially where non-payment of rent has occurred.

The landlord may need to go to court a number of times to establish a poor track record of the tenant as the court is very reluctant to grant possession first time for non payment of rent.

Ejectment for non payment of rent

This is based on Deasy’s Act,1860. The huge disadvantage is that the landlord must wait until one years rent is due-not very popular method for this reason.

Ejectment Civil Bill for overholding

This is used following service of a notice to quit or where the original lease has ended and the tenant remains in possession.

From the tenant’s perspective under the Landlord and Tenant Act 1980 he must now serve notice to seek relief, that is to seek a renewal of the lease) within a certain period following service of the notice to quit.

The Entitlement to a New Commercial Lease

The Landlord and Tenant Act 1980 which was amended byLandlord and Tenant Act 1994 provide statutory entitlements to tenants in a landlord/tenant relationship.

The reliefs apply where the property that is the subject of the agreement is a tenement which is a legal description but has been interpreted fairly generously. It includes buildings which are not permanent and can include sheds erected without planning permission.

To qualify for the statutory entitlements the main purpose/use must attach to the buildings. If there is land involved then the land must be subsidiary and ancillary to the main use of the buildings.

Section 16 of Landlord and Tenant Act 1980 provides that a tenant will be entitled to a new tenancy at the expiry of his existing lease if he can prove one of the following equities

Business equity-if the tenant was in occupation for 5 years continously and was using the premises/tenement for business purposes (this period used to be 3 years); temporary breaks can be disregarded by the courts. The five year period only applies to tenancies/leases which commence after 10 August 1994 and the tenant must occupy the tenement for the entire period

Long possession equity-this applies to both residential and business property and states that if the person was in occupation for 20 years then he/she was entitled to a new lease

Improvements equity-this also applies to both residential and commercial property and states that if the tenant would be entitled to compensation for improvements and they accounted for half or more than half of the letting value of the tenement when the notice of intention to claim statutory relief, then the tenant has an improvements equity

Terms of a new tenancy

These terms are to be agreed between landlord and tenant and failing that will be fixed by the court. If the tenant is entitled to a new lease based on business equity the new term shall be fixed at 20 years or such time as the tenant may nominate, provided it is over 5 years.

If the right to a new tenancy is based on long possession or improvements the term of the new tenancy will be 35 years or a lesser term that the tenant can nominate.

Rent

This will be fixed by the court at open market value if the landlord and tenant can not agree on a new rent.

Restrictions on a right to a new tenancy

Section 85 of the act prevented any provision contracting out of the Act. However this was changed re the tenant of an office premises who could contract out of his right if he took independent legal advice and signed a renunciation under sect 4of his right and this had to be done before the commencement of the tenancy.

Other restrictions include the situation where the tenant is in breach of the lease in respect of payment of rent.

Furthermore where the landlord intends to pull the building down in order to redevelop the building/site then he can refuse to grant a new tenancy.

However if this occurs and the tenant would have been entitled to a new tenancy otherwise, then the tenant is entitled to disturbance compensation which is a right of both residential and commercial tenants.

How to claim a new tenancy

The forms required are set out in Landlord and Tenant Regulations, 1980. This notice must be served before the end of the tenancy or within 3 months of the end. (The courts have discretion to extend these time limits in limited circumstances).

Compensation for improvements

This is available to both residential and business premises. Where a tenant quits a tenement because of the termination of the tenancy he is entitled to be paid compensation for every improvement by him or any predecessors in title which adds to the letting value of the premises.

However he will not be entitled to compensation if he has surrendered the lease or the termination is for non-payment of rent.

Improvement notice

Where a tenant proposes to make improvements to the tenement he may serve an improvement notice on his landlord.

If the latter ignores it then the tenant can go ahead with the works and is entitled to compensation. However the landlord can then himself serve an improvement undertaking notice on the tenant and execute the works himself.

Or he can object to the improvement notice and the tenant can then withdraw his notice or apply to court which can allow the tenant to make the improvement or reject his claim based on the fact that he has not been in occupation for 5 years and is consequently not entitled to a new lease.

Any covenants in the lease which prohibit the selling of the building or the change of use of the building will be interpreted as only prohibiting this to occur without the landlord’s consent, and this consent must not be unreasonably withheld.

A similar interpretation will apply to any covenant in the lease prohibiting the making of improvements.

Update

The Civil Law Act 2008 has made some changes to Landlord and Tenant legislation. Previously only the occupier of an office lease could contract out of his right to a new lease as outlined above.

The Civil Law Act 2008 now allows any business user to renounce his right and furthermore allows him to renounce not just prior to the commencement of the lease but at any time. He must still receive independent legal advice.