Retail leases: effective management is everything

Retailers and their advisers should have a clear understanding of what actions need to be taken after completion of a lease. Guy Whitehead offers a brief outline of what a retailer should expect and reflects good practice: Copies of the lease and any ancillary documents should be sent to the retailer for their records. Any data room that is provided for the retailer to access should be updated to include a copy of the lease and any ancillary documents (such as rent deposit deeds, licences for alterations, side letters, etc). A memorandum of lease terms should be produced and circulated to the retailer and their advisers. The purpose of the memorandum is to log key dates during the life of the lease such as rent start dates, review dates, break dates (including the notice period and conditions), term expiry dates and whether the lease is inside or outside the Landlord and Tenant Act 1954. The memorandum should detail any provisions that are specific to the premises, such as temporary trading exclusion zones or an obligation on a landlord to make a capital contribution. Retailers can save significant amounts of money by asking their legal advisers to pore over key lease terms on rent review, alienation, repair obligations, etc to see whether there is scope to take advantage of sub-optimal drafting or concessions that they may have missed. Calculate the stamp duty land tax (SDLT) and submit the return to HMRC (if necessary). It is important to note the reduction in the time period for submission and payment of SDLT from 30 to 14 days for transactions in England and Northern Ireland. This applies to leases with an effective date on or after 1 March 2019 (or before where that transaction becomes notifiable on or after 1 March 2019). For lawyers who are instructed to deal with post-completion SDLT work,  it is expected that the reduction will prove to be an issue on complex transactions that do not allow for the SDLT to be calculated ahead of completion. Lawyers will be under increased pressure to produce the calculations and returns quickly and retailers may have to change their internal procedures to ensure that any payments due and returns to be filed with HMRC can be processed within the 14-day period. ν Land Registry application submitted (if relevant) to register the lease (in the case of a lease for more than seven years) and to note the lease (in the case of a lease for more than three years). Any easements that are granted in the lease should be registered against the landlord’s title. Managing the estate Aside from the work that should be carried out in the immediate aftermath of completion of the lease, retailers can be proactive in the way they manage their estate and should seek to engage with their landlords on issues such as service charge delivery, which represents a significant overhead in the operation of a store. See also: Initiating the discussion Retailers should be encouraged to review service charge certificates to see if there is scope for any items of expenditure to be challenged in order to reduce their overall liability. Has the landlord sought to introduce a new item of expenditure into the service charge (such as the production of EPCs or the cost of improvements that have been made to improve the energy efficiency of the centre) which has been specifically excluded from the service charge in the lease? If so, the retailer will be justified in withholding this element of the service charge until it has been resolved with the landlord. Did the parties agree to a service charge cap that was ignored when the service charge certificate was issued by the landlord? Good lines of communication should ensure that any issues can be resolved without recourse to any formal dispute resolution procedure. Do circumstances change to such an extent that the lease should be re-geared? Retailers need to be alive to the possibility of re-gearing their lease(s), which represents a great opportunity for both landlords and tenants to rebalance their commercial objectives in order to achieve a mutually beneficial outcome. The opportunity for a lease re-gear (which can be initiated at any time) is often brought into focus by key events during the lifetime of the lease, such as rent reviews and tenant break options. These may lead to discussions as to whether the deal that was agreed when the lease was entered into still reflects the commercial reality of the market that the parties find themselves in and may allow retailers to negotiate rent-free periods or reduced rents in return for extended lease terms or the removal of a tenant-only option to break. Keep an eye on dates The prevalence of store closures in the current market has brought into focus the need for retailers to keep under review key dates for the service of break notices. If a decision is made to close a store, the retailer needs to arrange for the notice to be served by their lawyers in accordance with the lease. The retailer should be advised on which conditions, if any (such as payment of the principal rent) have to be complied with to ensure the break notice is effective. The timing of any store closure needs to be managed carefully (by coordinating the actions of the retailer and their advisers) to ensure that landlords do not tip off the staff of an impending closure (following receipt of a break notice) before the staff are informed internally by the retailer. See also: Lease negotiations: Consider the detail carefully When a decision is made to close a store, retailers need to consider what their potential costs will be both in terms of exit works by the retailer and a dilapidations claim by the landlord. Thought should be given as to whether a deal can be struck to offset any interim rent claim that the tenant may have against a dilapidations claim by the landlord. The retailer may decide that it is best to take a proactive approach and seek to agree a scope of exit works (based on a soft strip-out) with the landlord on lease expiry, with a view to reducing the dilapidations liability and leaving the landlord with the opportunity to quickly relet the unit. As part of the key dates that are logged following completion of the lease, retailers need to ensure that they comply with the growing lease SDLT regime. This is relevant where a retailer has been holding over for more than a year (following expiry of a 1954 Act protected lease) and a further calculation is required. It is advisable for a separate schedule for such leases to be produced so that the dates for holding over can be diarised and actioned. Retailers may be able to claim refunds from HMRC in certain circumstances where a return has been submitted for turnover rent leases. In this instance, SDLT is paid on a reasonable estimate of the rents payable. If it transpires that the estimates were wrong and the rents were less than anticipated, then a claim should be made to HMRC. Service charges The new RICS professional statement – Service charges in commercial property – effective from 1 April 2019 stresses the importance of transparency (so that all parties are aware of how service costs are made up) and communication (so that retailers understand what they can expect to receive and how much they are required to pay) in order to reduce the potential for disputes. It provides detailed guidance on what constitutes best practice. Occupiers should be notified of any significant changes to the service charge forecast as soon as possible. Managers should issue budgets to occupiers at least one month prior to the start of the service charge year. Annual service charge certificates should be issued within four months of the service charge year end. Guy Whitehead is a senior associate at Irwin Mitchell