Lease issues between occupiers and landlords come to the fore during a recession and require a degree of flexibility on both sides for the negotiations to be resolved amicably, says Jonathan Dent, of King Sturge in Newcastle.

AS recession bites deep into the earnings of high street retailers, service industries and manufacturers alike, lease terms signed during more buoyant times can seem impossible to meet.

Dwindling cash flow brings the spectre of administration looming, but such action must always be a last resort.

Pragmatism is the most powerful influence on the willingness of property owners to change the conditions of a lease, even though it might only be a year or 18 months old.

Landlords don’t want space back in the current economic conditions as they might well face delays in finding a replacement tenant, and no one wants voids.

A low rent is better than no rent, and landlords may well be able to use the negotiations to improve their position, for instance by lengthening the period of the lease or removing a break clause, which will give them additional security and higher capital values.

Increasingly, especially in the retail and industrial sectors, tenants are so concerned that they are asking questions they would never have considered a year or so ago. Most landlords are proving willing to listen and change their lease conditions if there are mutual benefits. There are several options.

The user clause or sub-letting provisions could be widened, allowing the tenant to sub-let part of their space, perhaps for an alternative use, so they can downsize and stay.

Tenants could also offer to extend their lease or remove a break clause, if the rent is reduced, or they might persuade the landlord to accept a rent-free period.

Tenants who believe the recession has strengthened their negotiating position are also pressing for their space to be refurbished, with the implicit threat that they might move elsewhere when the time arrives if improvements don’t happen.

However, despite the increasingly bleak economic landscape, there remains a significant potential downside to tenants adopting the take it or leave it approach.

Negotiations are often about brinkmanship, but tenants must first consider where else they might go, how much their removal costs would be, and how much they might have to spend on dilapidations to their present premises before leaving.

It is in everyone’s interests to reach a solution which allows both the landlord and the tenant to walk away, having improved their own position. Ideally, the former gets an enhanced long-term commitment in return for offering the latter increased financial flexibility.

A growing trend in the high street retail sector is for tenants to change payment intervals rather than trying to reduce the previously agreed rent.

Essentially, they are going to their landlords, explaining what state their balance sheet is in, and asking for sympathy. We have seen quite a number of cases where tenants request that they still pay in advance, but monthly rather than quarterly. Some, who have seen their cash flow virtually dry up, have offered to pay what they owe, but in the future, rather than immediately.

The most critical element of all lease negotiations during the present recession has to be an understanding of the wider issues. Realism is the key.

Jonathan Dent is a partner and head of lease consultancy at King Sturge in Newcastle