Rationalising your Real Estate for 2023 – your questions answered

Businesses tend to occupy property either as an owner or under the terms of a lease; when considering the sale of freehold property, it’s important to think about the timescale. If you are desperate to move the property from your books to repay debt or invest the sale proceeds elsewhere, it may be a straightforward sale for current use.

If, however, you can take a longer view, consider the development options e.g., option agreements, conditional contracts and promotion agreements – partnership with a developer to increase value for a sale. Before taking this route, you should:

• Liaise with your accountants to establish the capital allowance position to ensure you retain all available tax benefits.
• Understand your VAT election position on the property.
• Think about the statutory documents required e.g.:
  • Energy Performance Certificate (EPC);
  • asbestos reports;
  • fire risk assessments
  • environmental reports
  • building warranties; and
  • planning history.

The more comprehensive, the more realistic offers you can expect for the property and the smoother the conveyancing process should go. The EPC process is vital; if the property has a poor rating, you will find it quite difficult to move on. This EPC is also needed prior to marketing the site for sale.

Leasehold properties are often less straight forward to exit early. Check whether you have break clauses in your leases or look to negotiate a surrender, assign the lease to a third party or underlet. Underletting does not have to be the same term as the remainder of the lease. For example, if you had 15 years left on the lease and potential occupiers only wanted it for five years, you could underlet for five years. This would defray the occupation costs for those five years rather than remaining fully on your balance sheet. Break clauses are a very good way of exiting property early, but the terms of any break clause are strictly interpreted. Seek early professional advice and employ external professionals to serve the notices for you, as it is a complicated and high-risk process.

At the end of a lease, whether it is through expiry or early termination through a break clause, dilapidations – damages claim – will no doubt become an issue. There is always a negotiation around dilapidations between what the landlord asks for and what the tenant is prepared to pay and normally a deal is done. Seek advice from a building surveyor and potentially a litigation solicitor to ensure that the claim is dealt with appropriately. If, for example, the landlord will be demolishing the building as soon as the lease comes to an end, then it is unlikely there will be many breaches of the lease which could lead to a cash sum being due from the tenant by way of dilapidations. At that point if the carpet has not been replaced, for example, it is unlikely to cause the landlord a loss where the building is being demolished. There is plenty of case law and practice involved in arguing what is and what is not due.

The above was covered in our recent In-House with You Q&A by Real Estate and Real Estate Litigation specialists Philip Parkinson, Anthony Goodfellow and Andrew Walker – view the slides here. They answer some for your key questions from the session:

How long does the process usually take to obtain the landlord’s consent for an assignment or underletting?

Most commercial landlords will require the parties to enter into a licence to assign or licence to underlet (as appropriate) to document the landlord’s consent to the assignment or underletting. It varies from case to case but we would typically expect this process to take around six weeks, provided that the landlord and the landlord’s solicitors act promptly.

What are the landlord’s usual costs for granting consent?

The landlord’s costs for providing consent can vary (i.e., depending on the type of property and the complexity of the deal) but it is common for the landlord’s legal costs for a licence to assign or licence to underlet to be in the region of £1,250 plus VAT. Landlords sometimes also request that their surveyor’s costs are covered.

For new leases that we are looking to enter into, are there any tips or suggested amendments to the lease to help us assign or underlet in the future?

We would recommend that an experienced solicitor is instructed to assist with reviewing and negotiating any new leases. As part of this negotiation exercise, we would always seek to ensure that the landlord has to act reasonably in considering any application for consent to assign or underlet the lease. When acting for a tenant, we would also try and negotiate the lease so that the landlord’s conditions for granting consent are fair and reasonable. For example, we would push for an amendment to the lease so that, on an assignment of the lease, the landlord can only require the outgoing tenant to enter into an Authorised Guarantee Agreement (AGA) where it is reasonable to do so.

Following a break, can a tenant use ‘unjust enrichment’ arguments to claim a refund of any overpayments made during the lease term?

The overpayment of rent, for example, when exercising a break part way through a rental period would not be an ‘unjust enrichment’ since the landlord has a contractual right to receive such monies. However, most modern leases now include a provision requiring the landlord to repay to the tenant any ‘overpayment’ after the break date.

Do you agree that it is important for any organisation to seek independent, strategic advice from an experienced surveyor?

In short, yes! So much of selling a freehold property is dependent on local market conditions. If you want to really understand what your differential price expectations are between a quick, medium and potentially development long-term sale are, you need expert local knowledge. This will help you to make an informed decision – making a decision without reliable information is also called guessing! The surveyor should be able to guide on values and the best disposal strategies e.g., would a small amount of capital expenditure, pre-marketing, yield a quicker and more valuable sale? They could also offer an opinion on whether there is development potential