Retailers and casual dining operators in the UK confronted with liability for rents on former sites

A law firm has highlighted the additional plight of some operators of commercial premises in the UK, which this week were hit with a new 'rule of six' restricting gatherings in England.

Taylor Wessing says that with their current operations already impacted by a lengthy Covid-19 lockdown, some retailers and casual dining operators in the UK are now also being confronted with debt arising in units they divested some time ago.

The reason lies in rules existing in England and Wales for tenants to assign their leases: In order to consent to an assignment, landlords will typically require an AGA, or 'Authorised Guarantee Agreement', from the outgoing tenant. This instrument places an obligation on it to guarantee the performance of the new tenant under the lease. And this obligation can often last a long time, out of the control of the outgoing tenant; typically until the end of the term of the lease, or the point at which the new tenant goes on to assign the interest.

Experts at the law firm, Emma Oakley, Lauren Fendick and Clare Harman Clark, report that given the liability, many well-advised retailers and restaurant operators are understandably reluctant to agree to provide an AGA on assignment.

They explain: 'When setting up a new lease arrangement, it may be possible to qualify any landlord requirement for one, so it can only call for an AGA where it is reasonable to do so,' they say. 'This will give the tenant a better shot on assignment of arguing that an AGA is unnecessary, either because for example the proposed assignee has a robust covenant strength, or is putting up a sizeable rent deposit or another substantial guarantor as security.'

They continue: 'Once the lease is in place however, they often have little choice, as the requirement for an AGA will be hard baked into the terms of the lease as a pre-condition to assignment. At this point, it is up to the outgoing tenant to try and hedge the risks by investigating the covenant strength of the party they propose selling the interest to, to make an informed assessment as to whether the assignee is likely to be able to meet the tenant obligations under the lease for the rest of the term.'

Of course from the tenant perspective, those existing leases were negotiated without the experience of the uncertainty of a global pandemic. Even under normal circumstances, the most rigorous due diligence will not come with any guarantee of an assignee's future performance.

Many UK companies have already been taking a critical look at their current portfolios, perhaps shuttering some of their sites, with only the better performing locations re-opening for business after the lockdown.

Thinking strategically about risk could mean managing the existing costs of a real estate portfolio by negotiating a surrender with their landlords. Many operators prefer to pay a lump sum to get out of lease obligations altogether. Other options include sub-letting the premises to keep at least a degree of control. For those assigning, the upshot might mean that parties find themselves in the unfortunate position of having to meet rental liabilities not just on their future portfolios, but also on those previously-occupied sites, where assignees default on the lease commitments, or even enter into an insolvency process.

Taylor Wessing says it remains to be seen whether the fallout from Covid-19 will result in a fundamental shift in lease terms in some sectors and whether there will be a re-balancing of risk between landlords and tenants.

Greater flexibility around the pre-conditions to assignment, in particular waiving an absolute requirement for an AGA, could be one way in which landlords can shoulder more of the tenant covenant risk, the firm says.

'This requires a stronger appetite for getting to grips with and supporting tenant businesses. This may not be palatable for single-let assets, like logistics sheds, where the value of the asset is very much tied to tenant covenant strength and where any potential for this to be eroded over time could depreciate value. Given the crisis facing the retail and casual dining sector, however, it might be more acceptable to landlords with voids to fill.'



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