If a week is a long time in politics, then a year is a lifetime in the commercial property world, particularly if you are a retail landlord looking to bed down tenants in today’s difficult climate.
Many transactions for retailers to accept new leases take months or even years to come to fruition, particularly where there is a new shopping centre to be built. With such a dramatic fall in fortunes over the
last year, some deals done then look less attractive now; and some retailers who looked a safe bet then may be considerably weaker now. Landlords hoping to see contracts for new leases through to completion should take a second look at contracts before going ahead with a transaction.
Just as completion of the lease can be many months after the retailer became committed by exchanging contracts, so can it take many months from first agreeing terms with the retailer until finally signing on the dotted line. Re-evaluate risk and the protection afforded by the contract one last time before signing; after this point, there is no turning back.
We have seen several high street names enter into administration. How might this affect landlords? It could be that the administrator might ask the courts to enforce the contract. However, this is unlikely unless the contract committed the landlord to a substantial capital contribution or rent free period which the administrator wished to secure.
But to guard against this, landlords should ensure the contract entitles them to end the contract if the retailer enters into administration or becomes insolvent before completion. This will not only avoid the landlord having to honour a contract with a retailer
which it no longer wants at its centre, but will allow it to seek a new tenant to take the space without having to wait for the completion date to come and go.
If the contract is with a retailer who is already a tenant at the centre, then the retailer will most probably be required to surrender its existing lease before accepting the new lease. In this instance, it isn’t necessarily desirable to end the whole contract if the tenant becomes insolvent; try, instead, to allow the contract to continue only until the retailer is required to surrender its existing lease.
This could make it easier for the landlord to get the unit back, rather than taking the usual, longer route of seeking a court order or the administrator’s permission to forfeit the lease.
A tenant feeling the pinch might try to at least delay the rent commencement date, and might even try to get out of the lease altogether, by claiming that the development is not properly finished; in legal terms that ‘practical completion’ has not occurred. The contract should contain robust practical completion provisions, ensuring that the developer’s completion certificate is conclusive.
Capital contributions will be an attractive prospect for retail tenants, but landlords should exercise caution. Any capital contributions towards the tenant’s fit out should be phased over a period of months or even years after the tenant has commenced trading and certainly after the fit out has been completed. Landlords should consider what they are getting for their money, and seek an obligation that the tenant’s fit out is to a certain standard or quality.
Paying any capital contributions early runs the risk of a tenant receiving all the money and still not managing to complete, or installing a temporary fit out in order to claim the contribution and then trading for only a short period.
Take particular care whenever your contract to grant the lease contains significant landlord obligations such as development or alteration works, or tenant bespoke building. Reassess regularly, and particularly just before completion, whether your tenant will still be around on completion to pay the rent to justify the efforts.
Finally, be proactive – it doesn’t often help to wait for matters to improve. Even after contracts have been exchanged, deals can be renegotiated, timings altered, exposure lessened. Remember, though, that any changes to contractual arrangements must be carefully documented to avoid the disaster of invalidating the contract entirely.
Times may be tough, but savvy landlords can still protect their interests by making sure lease agreements are appropriate to current circumstances. Taking a final, last-minute look at contracts could make all the difference to valuable revenue.
Andrew Lewry is a partner in the property team at UK law firm Dundas & Wilson
