Having outlined The Costs of an Office Move, we’re going to delve into contracts and what you should be aware of when moving out.
So, you’ve reviewed your reasons to stay or go, looked into the cost implications and you’ve decided it’s time to move office. Now you need to understand some of the legal requirements of moving out.
Glossary of Common Terms
Before we get going on all of the legal considerations, it pays to understand some of the common abbreviations that you may come across.
What is LTA 1954? (The Landlord and Tenant Act 1954)
This is the law that governs how many business leases operate. Leases can be ‘inside’ the LTA 1954, which means at the end of the lease the tenant has a statutory right to remain at the property except in limited circumstances (e.g. the landlord wishes to redevelop). If a lease is “outside” the LTA 1954 it means that there is no right to a new lease and the tenant must vacate unless it agrees otherwise with the landlord.
What is SDLT? (Stamp Duty Land Tax)
This is the tax imposed by the UK Government on the purchase or lease of land and properties with values over a certain threshold.
What is AGA? (An Authorised Guarantee Agreement)
An AGA is a form of guarantee that may be given (as a condition of the landlord’s consent) by an outgoing tenant of its assignee’s obligation under the lease. The guarantee will only endure for so long as the assignee remains the tenant.
What is HMRC? (His Majesty’s Revenue & Customs)
The UK Government department responsible for the collection of taxes.
Vacating Your Current Property
What options do you have to get out of your current lease?
If the lease of the current premises is due to expire, then you simply need to make it clear to the landlord that you intend to vacate at the end of the term. If the lease is contracted out of security of tenure under the LTA 1954 there will be nothing else needed.
However, if the lease is inside the provisions of the LTA 1954, the position is more complicated. Legal advice will inform you of your options and ensure you are not bound to your lease for longer than necessary.
Does your lease include a break clause?
A break clause is a chance to terminate the lease before the fixed term expires. There may not be a break clause in the current lease and if one is included, it is likely to be operable on a fixed date only. It may also be a break that only the landlord can operate.
If there is a break clause, strict compliance with timings and conditions will be needed. Some common areas to check are:
Timings – how much notice is required? This can be a fixed period of notice e.g. ‘6 months’ notice to expire on the break date’ or more flexible e.g. ‘not less than 6 months’ notice to expire on the break date’.
Service requirements – the lease might include specific requirements that have to be complied with or the notice may not be valid. If in doubt, it is better to serve copies on the landlord’s registered office, any known trading offices and on any known managing agents and solicitors.
Conditions – if the break clause specifies any pre-conditions for the break clause being operated, these must be complied with. Common ones include:
- All rents are paid up to the break date
- All subsisting occupations (including subleases) are brought to an end and vacant possession is given
This latter condition can be problematic since it implies that the property is given back completely clear of the tenant’s occupation (including all belongings etc). Landlords have been able to argue that the break is not effective as the tenant has not adequately vacated the property on the break date.
This is an area where legal advice is sensible as the financial consequences of missing or failing to properly exercise a break can be severe.
Surrender of the Lease
If there is no available break clause, the tenant may be able to negotiate a surrender of the lease with the landlord. This is entirely at the landlord’s discretion. They may want to keep a good tenant in place rather than risk going to the market. Conversely, if the landlord thinks they may be able to re-let quickly for a better rent, then they would be quite receptive to this.
This would usually be affected by a short deed between the parties and if the lease is registered at the Land Registry. The lease title would then need to be closed. Note: that if one party is paying the other a premium for the release there may be SDLT implications.
In agreeing to surrender, the landlord may not want to release certain liabilities. A typical example is the ‘repair and decoration’ clauses in the lease. They may want to reserve their position on any dilapidations claim in particular. A tenant will want to make sure that their liability is crystalized and so should seek to include any amount relating to dilapidations in the agreed surrender premium.
Assignment /Subletting
If there is no way to bring the current lease to an end, the tenant will need to investigate the options for assigning or subletting it. Neither of these options will completely bring the tenant’s risk of liability to an end. However, they may in practical terms pass it on to another party.
In both cases, the terms of the lease should be carefully checked to see what conditions the landlord can impose in either giving or withholding their consent. Leases usually specify that consent shall not be unreasonably withheld or delayed but subject to various requirements.
Be aware that the landlord usually requires their professional fees to be met when considering an application to assign or sublet (even if the answer is ‘no’).
Assignment – this is where the tenant seeks to transfer its interest in the lease to another party. Note that for leases granted after 1995, an assignment will operate to release the outgoing tenant from liability. Therefore, the landlord will usually require an AGA as part of its licence to assign.
Other conditions may be that:
- No money is to be outstanding under the lease (check insurance and service charges)
- The incoming tenant provides a rent deposit, personal guarantor (e.g. parent company, director) or a bank guarantee.
- Evidence of financial information for the incoming tenant e.g. 3 years’ audited accounts, which may be problematic for a newly-incorporated company.
Subletting – this is where the tenant seeks to grant a sublease of the property to another party. Note: that in this situation the tenant will remain primarily liable to the landlord for the head lease obligations. Therefore, the tenant needs to ensure that the undertenant complies with those obligations through the provisions of the sublease.
A sublease cannot be granted for a period longer than the head lease so the tenant should expect to get the property and all liabilities under the leaseback at the end of the term. Common requirements for subletting are that the sublease is contracted out of ‘security of tenure’ under LTA 1954. (This is so that on the determination of the head lease, the landlord does not have a subsisting sublease with security which would carry on).
Other Considerations When Leaving Your Current Property
By now, you understand some of the complexities of leaving your current office. However, there are a couple of further considerations.
Repair
If the property is not in the condition required by the lease (often ‘good and substantial repair and condition’), decoration is required and alterations need to be reinstated.
The landlord would typically require these to be carried out if the lease is being brought to an end. The lease terms should be carefully checked. The landlord will normally serve a schedule of dilapidations requiring the works it considers necessary to be carried out and specifying the costs.
There is scope for negotiation here and professional valuer’s advice should be obtained. The tenant might prefer to carry out the work or pay the landlord a cash sum in settlement.
Rent deposit
Does the landlord hold a sum of money as security for the tenant’s obligations and if so, how much and where is it?
There will usually be a separate rent deposit deed managing this and the funds are usually held by the landlord in a separate interest-bearing account with the tenant’s interest in them charged to the landlord. The landlord can call on these funds to meet the cost of remedying breaches under the lease. The tenant may need to top the funds up to the specified level.
The parties might want to use the rent deposit funds to clear or offset outstanding liabilities under the lease, e.g. rent, service charges, insurance, dilapidations etc. Note: that the landlord has most of the control here.
Rent reviews
If there is an outstanding rent review on the date the tenant wants to break, assign or sublet, the landlord will want to implement this, as it is likely to result in a rent increase.
The tenant can negotiate this (especially if it is an open market review) and pay any back rent due. On an assignment, the deposit funds will usually need to be paid back. Then the incoming tenant enters into a new rent deposit arrangement with the landlord.
Land Registry
An area dealt with by the solicitors, but let’s make you aware that leases over 7 years in term and other specific leases are compulsorily registrable at the Land Registry.
As a result, on termination or expiry of the lease, any existing title will need to be closed. On an assignment or subletting, you will need to demonstrate that your lease has been properly registered and if not, you will need to ensure this is done, possibly at short notice.
That’s a lot to take on board, but not all will apply. So, check your lease to see what is relevant.
Please note: this is a general guide and we advise you to seek specific legal advice that is relevant to your business circumstances.
We can’t assist with the legal aspects of moving office, however, if you are planning an office move and would like a copy of the complete Office Relocation series, or need support with handling the IT infrastructure we can assist. Contact us today to find out more.
