Those entering retailing are reminded/cautioned about the contingent liability remaining after they have sold up and transferred their lease to the new owner.
History
The two main elements in a lease - the "contract" and the "property" have together generated a wealth of Court decisions in the past few years. They remind us that tenants negotiating leases with landlords must be alert to the risks.
Most orthodox leases contain provisions allowing tenants to transfer the lease on certain conditions - for example, if they can show the landlord that the incoming tenant is responsible and can pay the rent. There are sound commercial reasons for these provisions.
If a shop proprietor knew his lease could not be transferred he may feel trapped in a business. Landlords might not attract tenants. On the other hand the landlord wants protection against a tenant introducing a ne'er-do-well as the next tenant. The landlord wants business as usual.
Changing Times
The difficulty for a landlord is that they do not know who in the future the "first" tenant they signed up will transfer the lease on to. So a landlord will almost always retain the right to claim against the first tenant (and all subsequent tenants in the lease chain) if any tenant defaults. This is understandable for the protection of the landlord - but not a happy situation for that retired "first" shop owner receiving a nasty letter from the landlord calling upon him to pay rental for a defaulting tenant who has flown the coop.
The risk for retailers in the past may have been manageable - a standard shop lease may have been for a short term. However in recent times the large mall landlords have tended to want tenants signed up to longer terms. These mall leases are lengthy documents and place comprehensive obligations on tenants - bringing more commercial risks for the tenant.
Caution Please
If you are an outgoing tenant:
- Place your own measure of worth on the person buying the business and lease. Don't rely on the landlord's measure - they may base their decision on still having you in their sights if something goes wrong. You may only have one round in the chamber, i.e. against the person you sell to if he/she defaults under the lease. Make inquiries about your purchaser's background. Weigh up the commercial risks of the ongoing contingent liability you have under the lease with the benefit of selling the business for the right price.
- Ensure the documentation is correct. Professional advice will be required to guide you on appropriate indemnities. Attention to detail at this point is all important.
- Inquire if you can keep insurance cover in place to protect you against future tenant default.
- Bear in mind that if the term of your lease can be extended by renewal your contingent liability may remain a live issue until the end of any extension or renewal period.
May 2004
All information in this article is to the best of the author's knowledge true and accurate. No liability is assumed by the author for any losses suffered by any person relying directly or indirectly upon this material. It is recommended that you should consult a senior representative of Rotherhams before acting upon any information provided in this article.
