Exit Strategies for Business Tenants

Abstract

Adaptability is critical to success in business. Yet, many businesses in the UK occupy premises on fixed term leases, which run for several years, a feature that has great appeal to investors. However, during this time property requirements can change. This research critically examines the three main mechanisms by which tenants can bring their leases to an end, breaks, assignment and subletting. We examine the legal rules governing these devices and undertake analyses of lease data and interview and questionnaire surveys. The research finds that break clauses are an increasingly common exit mechanism agreed in the leases of office and industrial property tenants but are less frequent in retail markets. However they are not usually operated, raising questions about their purpose and timing. Breaks cannot give the more general flexibility of assignment and subletting, although these latter clauses are not often part of lease negotiations. Landlords have legitimate reasons for preventing some assignment and subletting but can be unnecessarily restrictive on some aspects. Addressing the disparate concerns of both sides of the landlord and tenant relationship on lease flexibility is a challenge to the property industry and to policy makers.

Keywords:

• Commercial real estate
• business tenants
• lease terms
• assignment
• subletting
• breaks

Notes

1. The standard form of this type of review is that the rent can remain the same or increase at rent review, but can never fall, even if market rental levels have dropped.

2. It is recognized that subletting can be a positive tool for flexibility in estate management as well as an exit strategy. Likewise, assignment may be used strategically to realize capital value for a tenant. However, our concern in this paper is the use of these mechanisms as the means of leaving unwanted premises.

3. United Scientific Holdings v Burnley Corporation (1978) AC 904.

4. See for example Trane v Provident Mutual Life (1995) 1 EGLR 33.

5. Hankey v Clavering (1942) 2 KB 326.

6. Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd (1997) AC 749.

7. Adler v Upper Grosvenor Street Investments (1957) 1 All ER 229, Bocardo SA v S & M Hotels Ltd (1979) 3 All ER 737, Allied Dunbar Assurance plc v Homebase Ltd (2002) EWCA Civ 666.

8. Allied Dunbar v Homebase Ltd (2002) 2 EGLR 23.

9. NCR Ltd v Riverland Portfolio No 1 Ltd (2004) EWHC 921.

10. See Creery v Summersell (1949) Ch 751; Hill v Griffin (1987) 1 EGLR 81.