How to Plan for an Office Move – Leaving Current Office
Legal Considerations when Leaving your Current Office
Welcome back to our series on how to prepare for an office move. Last time we considered the costs associated with moving office and this time we’re going to delve into all of the legal aspects that come with preparing for a move.
So by now, you’ve reviewed your reasons to stay or go, looked into the budget requirements and you’ve decided it’s time to move office. Now you need to know what to do next, so here are our best tips.
Understanding your legal requirements
It’s important to understand the legal requirements you face when moving office so that you can be as prepared as possible. We’ve been lucky enough to team up with Knights PLC who have worked with us on preparing the information in this guide.
It’s worth noting, this is only a general guide and as always; tenants should take specific legal advice on their actual individual circumstances before proceeding.
Glossary of common terms
Before we get going on all of the legal considerations, it pays to understand some of the important terms that will be used in this guide.
What is the Landlord and Tenant Act 1954 (LTA 1954)?
The law governing 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 Stamp Duty Land Tax (SDLT)?
The tax imposed by the UK Government on the purchase or lease of land and properties with values over a certain threshold.
What is an Authorised Guarantee Agreement (AGA)?
A form of guarantee which 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?
The non-ministerial department of the UK Government responsible for the collection of taxes.
Your current property
When it comes to your current office, the question is; what options do I have to get out of my current Lease?
Here’s Knights PLC with the answer:
This is the most straightforward way. 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. If however, the lease is inside the provisions of the LTA 1954 the position can be more complicated and it is important to obtain legal advice to make sure you are not bound into your lease for longer than necessary.
There may not be a break clause in the current lease at all. Landlords will often resist these and if one is there at all it is likely to be operable on a fixed date only. For example, on the 5th anniversary of the commencement date of the term. It may also be a break that only the landlord can operate.
If there is a break clause however, it should be noted that strict compliance with timings and conditions will be needed. Some common areas to check are:
Timings – how much notice is required? is it 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 must be checked to ensure that any specific requirements are complied with. Therefore, if the lease requires service by hand at the landlord’s registered office in the Cayman Islands then that should be done 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 then these must be complied with. Common ones are that 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) and landlords have in the past 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.
If there is no available break clause then the tenant may be able to negotiate a surrender of the lease with the landlord. This is entirely at the landlord’s discretion and they may well want to keep a good tenant in place rather than risk going to the market for a new one. 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 a surrender, the landlord may not want to release certain liabilities. For example: the repair and decoration clauses in the lease, particularly if at the date of surrender the property is not in the condition required by the lease. They will therefore want to reserve their position on any dilapidations claim in particular; conversely a tenant will want to make sure that its 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 at least for a time.
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.
The landlord usually requires its professional fees to be met in considering an application to assign or sublet (even if the answer is ‘no’) and so the cost of these should be factored into the tenant’s plans.
Assignment – this is the situation 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 and so 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 (insurance and service charge should be checked) and that the incoming tenant provides a rent deposit, personal guarantor (e.g. parent company, director) or a bank guarantee. The landlord will usually require to see financial information for the incoming tenant e.g. 3 years’ audited accounts, which may be problematic for a newly-incorporated company.
Subletting – this is the situation 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 headlease obligations and so will need 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 headlease so the tenant should expect to get the property and all liabilities under the lease back at the end of the term. Common requirements for subletting are that the sublease is contracted out of security of tenure under LTA 1954 (so that on determination of the headlease the landlord does not then have a subsisting sublease with security which would carry on).
Other considerations when leaving your current property
By now, you understand the details of how to navigate your current lease, but another question you may have is; are there any other issues I might need to address when getting out of my current lease?
Here’s the team at Knights PLC with the answer:
If the property is not in the condition required by the lease (often ‘good and substantial repair and condition’), decoration is needed or alterations need to be reinstated. The landlord may require these to be carried out. Particularly 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 works itself or pay the landlord a cash sum in settlement.
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 required to be 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 and then the tenant usually needs to top the funds back 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 charge, insurance, dilapidations etc. Note: that the landlord has most of the control here.
If there is an outstanding rent review at the date the tenant wants to break, assign or sublet, the landlord will want to implement this if they can, especially if this is likely to result in an increase in the passing rent. The tenant should therefore expect to 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 and then the incoming tenant enters into a new rent deposit arrangement with the landlord.
This is usually an area dealt with completely by the solicitors, but be aware that leases over 7 years in term and certain other types are compulsorily registrable at the Land Registry. This will mean that 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 if required and if not you will need to ensure this is done, possibly at short notice.
Next up in our guide to planning an office move is everything you need to know about taking on a lease for your new office.