Flexibility vital in changing market

Oct 15 2008 By Chris Hugill for The Journal

AS WE have seen in recent months, economic conditions can change quickly. In such times, flexibility in property arrangements will be key to how an organisation can respond to such economic conditions.

In the last few months, several clients have sought advice from us about reshaping their businesses to reduce costs, including moving to a single site from a number of sites. This is rarely a quick fix but will usually be achievable. There may, however, be an immediate cost attached to this.

In order to move to a single site, an organisation may have to sell its surplus land. This may involve selling the land for an alternative use.

Those purchasing land for a different use to the land’s current use usually impose a condition that they will only proceed to purchase the land if planning permission is obtained for the alternative use.

Obtaining such planning permission can be a lengthy process. There may also be other issues which delay or prevent the sale, such as a covenant restricting a change of use or other impediments on which legal advice will be needed.

Where sales of land for development purposes have been agreed some time ago, the developer may no longer want to proceed in the current climate, or at least not at the price previously agreed. Developers may now be looking to rely on those conditions in sales contracts that give a degree of flexibility to the developer, enabling the developer to withdraw if a planning permission is not suitable.

Where an organisation is leasing commercial premises, the occupier may have a break clause enabling it to end the lease early after serving a notice. Any conditions that have been drafted in the lease which dictate when such a break can be exercised, such as keeping the premises in repair or serving a notice by a stated date, will be strictly interpreted and legal advice should be obtained at the earliest opportunity to avoid the risk of the benefit of such a clause being lost.

If there is no break clause and the lease has several years to run, then the occupier may be able to sell the balance of the lease to another occupier.

As an alternative, the occupier may be able to agree with the landlord that the lease can come to an early end. This is known as surrendering the lease. In this situation, the landlord will be in a strong negotiating position and may require monetary compensation to make up for the fact that he will not be able to collect rent for the remaining years of the lease.

If an occupier simply decides to mothball the premises by paying rent but leaving the premises empty, before doing so, it should consider whether there is an obligation in the lease to keep the premises open for business. If such an obligation is breached then the tenant may be liable to the landlord for damages or the landlord may seek to bring the lease to an early end.

Planning for all contingencies when first buying or entering into a lease of a property is clearly a big advantage so that these arrangements can allow a business to make changes to how it operates in the future.

However, during a period of expansion, many ignore some of the risks which may arise if economic conditions change. A prudent business should consider all the legal implications associated with vacating any premises it occupies, and ensure that these are dealt with in the best way possible prior to occupying such premises to allow flexibility and to avoid additional cost in the future.

For advice and assistance on property matters, contact Chris Hugill at chris.hugill@wardhadaway.com or on (0191) 204-4230.