Commercial Real Estate

I want to purchase a development site and the owner has suggested a four-week exclusivity period.  Is it worth doing this?

An exclusivity agreement (also known as a lock-out agreement) is where a seller agrees with a potential buyer not to negotiate with any third parties for a certain period – known as the ‘lock-out period’ or the ‘exclusivity period’.

This might give some comfort to a buyer, but it is important to note that an exclusivity agreement cannot require either party to proceed with the sale/purchase or to honour the agreed terms. It simply stops the seller from negotiating with another party.

If you want the seller to be required to proceed on the agreed terms, then an option agreement may be a better solution for you.

What is the difference between an option agreement and a conditional contract?

An option agreement and a conditional contract are two forms of contract commonly used to structure the sale and purchase of development land. While they share some similarities, they have different implications.

A conditional contract requires the developer to purchase if a specified event arises – for example the grant of planning permission.  A conditional contract therefore requires the parties to agree a detailed list of conditions that must be satisfied to trigger the obligation to purchase.  Most developers will want the list to include as many requirements as possible and most landowners will want that list of criteria to be as small as possible.  Conditional contracts can therefore take some time to negotiate.

An option agreement differs from a conditional contract as it grants the developer the right –but not the obligation – to buy the development land within a specified timeframe and at a predetermined price. The developer is under no obligation to proceed with the purchase, even if the developer is successful in securing planning.

Option agreements are therefore usually far quicker to negotiate than conditional contracts.

What are the key points I need to consider when negotiating terms for an option agreement?

The following are some essential points to cover during the negotiation process: 

• Property Extent – Clearly define the land that is covered by the option. If the land is part of a wider title, consider whether any easements or covenants will be required by either party 

• Duration – How long will the option last for? Will the developer be able to extend this date for any reason? Will there be an ultimate longstop date?

• Option Fees – Will the developer be paying a fee to the owner to enter the option? If so, will this be refundable and/or deductible in any circumstances?

• Price – What will the price be? Is this a fixed price or subject to adjustment for any reason?

• Completion – How long after exercise will the developer have to complete the purchase of the land?

• Assignment – Can the developer assign the benefit of the agreement to another party?

• Entry – Can the developer enter the property during the option period to carry out surveys, investigations and other works? 

• Landowner obligations – Does the developer require the landowner to do anything during the life of the option agreement, such as join into a s106 agreement

What is a promotion agreement?

 A Promotion Agreement is an agreement between a landowner and a developer/promoter where the promoter agrees to try to obtain planning permission for development on the owner’s land.

The promoter usually has to fund the costs of promoting the land itself. In return for this risk, the owner agrees to sell the site on the open market if planning is ever granted.  When the site is sold, the owner must pay the promoter a fee (usually a percentage of the sale price). The owner also usually agrees to reimburse the costs incurred by the promoter.

Promotion Agreements offer landowners a way to unlock the development potential of their land without taking on the financial and administrative burdens associated with securing planning permission. For promoters, these agreements provide the opportunity to profit from obtaining planning permission without having to take on the burden of purchase and construction.  Both parties have an alignment of interests as both benefit from maximising the value of the land.

My property has a low EPC rating – will that cause any problems for me granting a commercial lease?

Generally speaking, it is unlawful to grant a lease of substandard property. This means a property whose energy performance certificate shows an F or G rating in respect of energy efficiency. There are some exemptions to the rules, for example, where the energy improvement works would devalue the property. Potential penalties for non-compliance are the issue of fines to landlords and the entering of details of the breach on a public register. Landlords should also be aware that the minimum rating of sub-standard property may well change in the future, exposing more properties to the regulations.

What are the risks of taking a commercial lease of property in a poor state of repair?

A commercial lease will contain a number of obligations that expose business tenants to liability for repairing a property, either directly, through obligations to repair the property, or indirectly, by requiring a business tenant of a multi-let building to contribute to the upkeep of the building via a service charge. Business tenants should ensure that they carry out surveys and enquiries at an early stage to assess their potential liability for repair and service charges and, if necessary, limit their liability through the lease terms.

How can I ensure that my commercial lease acquisition proceeds quickly and cost-effectively?

Some transactions involving the acquisition or disposal of commercial leases become delayed or expensive due to protracted negotiations over lease terms or where problems with the property are encountered during a business tenant’s investigation of the property. We find that legal negotiations can be minimised if the parties agree clear terms at the outset. Commercial landlords can also avoid issues arising during a business tenant’s investigations by reviewing their portfolios to ensure that any issues are resolved before the process of granting the commercial lease begins.

What are my options if my business changes and I no longer need my commercial lease?

In these circumstances business tenants will want to check their commercial leases for break options – unilateral rights to terminate the lease on a particular date. Alternatively commercial leases can often be assigned, or the property sublet in whole or in part, to mitigate the cost of the lease. In such cases however be aware that the landlord’s consent is usually required for assignment and subletting. The landlord may also agree to accept a “surrender” where it takes the commercial lease back (although landlords cannot usually be compelled to agree to this approach and may require payment to do so). We would always recommend considering the inclusion of break rights when you are negotiating the terms of the commercial lease and taking legal advice should your commercial lease no longer be required.

My business has a lease of commercial property.  Do I need consent from my landlord to transfer my lease, underlet the property or carry out alterations?

Most leases of commercial property set out in detail the circumstances in which the tenant can transfer the leases, grant underleases or carry out alterations.  The consent of the landlord will usually be needed but there may be a requirement that this consent cannot be unreasonably withheld.  An application to the landlord for consent will be needed and, if the landlord is willing to give consent, the terms of a formal “licence” will be negotiated.  External or structural alterations are often prohibited; whether this is the case will depend on the nature of the property and the terms of the lease.

Is the tenant responsible for the landlord’s costs in handling an application by the tenant for consent under a lease of commercial property?

Usually yes if the application is made during the term of the lease.  The landlord’s solicitors will often require an undertaking from the tenant’s solicitors to pay those costs. If consent is being sought for initial fitting-out works then it would be more usual for the parties to bear their own costs.

As a landlord of commercial property will my tenant remain liable after the tenant transfers the lease?

In leases of commercial property granted since the start of 1996 tenants are usually released from future liability when they transfer their leases.  However, a lease can require an outgoing tenant to enter into an “authorised guarantee agreement” when transferring the lease where the outgoing tenant guarantees the obligations of the next tenant.  This point should be agreed at heads of terms stage.

Is the liability of the tenant to the landlord under a lease of commercial property affected if the tenant grants an underlease?

 Usually not. The tenant would remain liable to the landlord under the provisions of the “superior lease” (i.e., the initial lease granted by the landlord to the tenant). There will be a separate party (the undertenant) in occupation of the property paying rent to the tenant under the new lease granted by the Tenant (the underlease).

When my company is borrowing money from a bank, why does the bank ask for a personal guarantee?

A personal guarantee is often requested from one or more directors of a company. This is because the liability of a company is limited and unless the company has sufficient financial strength the bank may ask for personal guarantees so that the directors are also personally liable for the debt in the event of default. This gives the bank more security and the opportunity to pursue the directors personally. It also potentially allows them to pursue any capital or assets held by the directors, particularly where there is a shortfall and the sale of the company’s assets (usually the property which has been charged) is insufficient to redeem the debt or if they have doubts about the borrower’s ability to perform its obligations under the loan agreement.  This reduces the risk to the bank.

Why does a bank require me to obtain independent legal advice when giving a personal guarantee?

A bank will usually require an individual to obtain advice from another solicitor when they are guaranteeing a debt to which they are not a party. For example, where the loan is given to the company and the director guarantees the loan.  The purpose of the independent legal advice is to ensure that the individual is advised and fully understands the implications, consequences and risks of personally guaranteeing a debt owed by another person or company. The advice is given by a solicitor who is not acting for the borrower, to ensure there is no conflict of interest.

What is a debenture?

A debenture is a document which grants a lender security over all the assets of a limited company. In the context of a secured lending transaction, it is seen as additional security by the bank that can be used if a company defaults on its repayments to the bank. Like other types of security, such as legal mortgages, the debenture will be enforceable if the borrower defaults under its loan agreement when the bank can enforce under the powers granted in the debenture (often by appointing an administrator). The debenture does usually contain a ‘negative pledge’ which means the borrower company should not incur other debts or grant security to anyone else without the consent of the bank.

What are common issues that come up on secured lending work that may cause delays to a transaction?

The main cause of delay is when the borrower’s house is not in good order. For example:

• There are missing documents
• Land Registry titles are not correct
• Leases are not completed (or are non-compliant and defective)
• There are missing regulatory documents in respect of the property
• There have been breaches of planning or building regulations.

All these issues need to be rectified or insured against to ensure that if the bank has to enforce its security and sell the property, the value of the property would not be adversely affected. If you are intending to refinance a property (or a portfolio) then it may be prudent to ask the solicitor acting for you on the refinance to check the documentation is all in good order prior to instructing the bank’s solicitor.