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Although online sales have become increasingly important to fashion retailers, most still want a “bricks and mortar” presence on the high street too. In times of relative prosperity, retailers may open and operate multiple stores, but when confidence in the economy wavers, as some commentators have suggested may happen following the Brexit vote, retailers may consider it necessary to close underperforming branches. How easily this can be done will depend on the leases that the particular business has entered into for retail space.
The typical options available to a retailer for getting out of a lease are as follows:
This article focuses on the three options that will need to be considered when the lease does not contain a break clause.
Retailers will first want to find out as much as possible about their landlord’s negotiating position. Ideally, landlords want to have a reliable tenant and certain rental income, but when the market is depressed, a landlord may itself be experiencing cash flow issues, and therefore be happy to consider an immediate cash payment in exchange for releasing a tenant from a lease. Conversely, if it is the retailer that is in financial difficulty, the landlord may prefer to negotiate a new agreement rather than risk the retailer defaulting on the rent.
If the lease does not contain any break right, the landlord may still be prepared to negotiate its termination. Whether or not that is the case will usually depend on market conditions. In a weak property market, the landlord may not be able to find a new tenant and may therefore be unwilling to agree to a premature termination of the lease. Even if the landlord is in principle willing to negotiate a surrender of the lease, it will certainly require a payment from the tenant in exchange for an actual agreement to that effect.
Where a surrender is agreed, retailers should remember to comply with any terms of the lease that require them to put the premises back into their original condition on termination, since they may be liable to pay additional costs in relation to repair and redecoration.
A lease may allow for its assignment to a new tenant – however, that can be a time consuming and costly process. The retailer will need to find a new tenant and then negotiate with both that new tenant and the landlord (whose consent for an assignment will normally be required). Again, depending on the terms of the lease, the retailer may still be liable for future payments of rent owed by the new tenant or it may be required to guarantee some or all of the new tenant’s payments and obligations. The new tenant may be asked for a rent deposit or guarantee, and it is worth remembering that a retailer will normally have to assign the lease to a fellow retailer, since the permitted use of the premises may be restricted under the lease. For these reasons, if a lease does not have long to run, it is usually preferable to negotiate its surrender with the landlord rather than assign it.
A lease may grant a tenant the right to sublet the premises – again, subject to the landlord’s consent. Retailers should remember that (a) a lease may restrict the amount of rent that it can charge, amongst other conditions, and (b) even if premises are sublet, the original lease will still be in place, and they will retain the primary obligation to the landlord. It is therefore important to investigate the financial standing of any potential subtenant.
As will be seen, a retailer’s options for getting out of a lease will largely be determined by the flexibility that lease grants them, so it is worth giving thought to such issues (and getting legal advice on them) at the outset of the tenancy, when the lease is negotiated.