This article explains the legal implications for a tenant running its business from its leasehold premises if its landlord has decided to sell up.
It is natural for a tenant to be concerned as not only is the relationship that has been built up going to come to an end but, inevitably, they will wonder how the change of landlord will impact on them and their business and whether the rules governing the relationship will change.
Your business lease
The good news is that, where an ‘outgoing’ landlord assigns its reversionary interest, any ‘ingoing’ landlord will inherit both the benefit of any business lease in place at the time as well as the landlord obligations contained within it. It is not the case that a business lease can be terminated by an ingoing landlord - the only way, in law, that the lease can end is, if the term expires or a break option is exercised or the lease is forfeited by the landlord because a tenant has breached the lease terms or if the lease has been surrendered. Outside of these scenarios, the lease remains in force, whoever the landlord is. This applies to whatever type of business premises, whether they are retail or restaurant, offices or warehouse – the rules are the same.
Furthermore, the rules governing the relationship between the outgoing landlord and the business tenant will be exactly the same rules that will govern the relationship between the ingoing landlord and the business tenant and these are as set out in the lease (and any subsequent documents that may have been signed by both parties relating to the lease terms). There is no ability for an ingoing landlord to unilaterally change those terms. Obviously, to whom the rents are paid and to what account would change and, even then, that instruction would have to come from the outgoing landlord who should write to the tenant confirming that it sold its reversionary interest, the date of sale and the new payment details.
Advance payment of rents
It is worth addressing how advance payments of rents and rent deposits are dealt with where a landlord changes. Any advance payment of rent covering a period where the ingoing landlord owns the reversionary interest would be apportioned as between the outgoing landlord and the ingoing landlord. The tenant should just make sure that it leaves plenty of time for the next rent payment to be set up to go to the ingoing landlord but that will be the only change for the tenant.
As to rent deposits, the ingoing landlord will expect to inherit the benefit of that security and, in any event, by virtue of Section 28 of the Landlord & Tenant Covenants Act1995, the outgoing landlord’s obligations in the rent deposit deed as to how the deposit is held, paying out interest, return of the deposit etc. will bind its buyer. If anything, the outgoing landlord could continue to remain bound by the terms of the rent deposit deed and has to obtain an express release from the tenant, there is no automatic release once the reversionary interest changes hands. It is always worth asking what the position is with any rent deposit where a tenant has been notified of a change of landlord, to ensure that the ingoing landlord knows about the deposit and understands its obligations to you under the terms of the original rent deposit deed!
Registration at the Land Registry
A tenant of commercial premises can alert others to the existence of its lease by way of registration at the Land Registry. Where there is a lease of 7 years plus, it will be registerable in its own right at the Land Registry (and would therefore appear on any searches against the property address) and a note of that registration will appear on the outgoing landlord’s title so that anyone looking to buy from them can see the lease. Where the term of the lease is less than that, depending on how long it is, if the lease refers to rights over other property or the rest of the building, this can be noted against the outgoing landlord’s title again, albeit not registrable in its own right but it would still serve to alert anyone of the lease’s existence.
Informal leasing arrangements
There are some instances where the business tenant who has got wind of an impending sale by its landlord may want to act fast. If the tenant has the benefit of an informal arrangement with the outgoing landlord, notwithstanding what the lease says, that arrangement will not be binding on the ingoing landlord and, so, it would be good to try and formalise those arrangements and make it part of the lease so that the ingoing landlord is obliged to carry on with that arrangement.
Similarly, if a rent review is outstanding or it has been agreed that the rent will not increase, the tenant should seek to get that formalised by way of a rent review memorandum so that there can be no dispute with the ingoing landlord. More often than not, a business lease of a certain length will contain provisions whereby the rent can be increased to what is considered to be the market value (if the market is buoyant, of course, otherwise it continues as it is) and because time is not of the essence in carrying out the review, it is possible for a tenant to find itself in a situation where there has been no conversation or dialogue about a rent increase and years have gone by, the ingoing landlord becomes aware of it and, if the market value did increase then the shortfall between the rent paid and the revised rent could be payable for the period from the review date onwards, with interest.
Essentially, where the business tenant find itself in a situation where the landlord changes, it is always best to start off the new relationship on a positive note in the hope that the arrangement continues to be stress free and meets the tenant’s needs which, in turn, one hopes, will allow the business to continue and flourish in the same environment.