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Legal
Can a periodic business tenant in occupation of premises obtain a lease from their landlord? Selling a Business?
You are a commercial tenant runningLegal Tips on a business from premises and you now want your landlord to grant you a written lease for a fixed term. Maximising your Profits Alan Zeffertt Consultant You may have been paying rent lease, perhaps in order to grow resolve the dispute which could be a new lease, the tenant will be monthly or quarterly for some years, but your landlord has still not given you a fixed term lease. What can you do to force the landlord’s hand? Rights under a periodic tenancy It is likely that you are a periodic tenant and if you have been in occupation of business premises paying rent for more than 12 months, you will have become a protected business tenant with the rights granted by the Landlord & Tenant Act 1954 Part 11. As such the landlord cannot simply terminate your lease by giving you one month’s notice. It would need to serve you with a statutory notice under the 1954 Act giving you not less than 6 nor more than 12 months’ notice and you will then have the right to apply to the court for a new lease on terms to be agreed or decided upon by the court. Can you require the landlord to grant a new lease? If the time has come that you need the certainty of a fixed term or sell your business, you will not be able to serve on the landlord a notice under section 26 of the 1954 Act requesting a new lease. The right to do this only applies to tenants whose tenancy was granted for a fixed term certain exceeding one year or for any term and thereafter from year to year. So what should the tenant do? Negotiate with your landlord A periodic protected tenant should be in a strong position to negotiate a new lease with the landlord who would be keen to regularise the position. Without a lease, the landlord cannot unilaterally increase the rent, or regulate the use of the premises or prevent the tenant from sharing occupation or assigning its tenancy. It is unlikely that the landlord could easily sell its interest in the property while a protected periodic tenant contiuues in occupation for an indefinite period. With oral tenancy agreements if a dispute arises the court would need to hear evidence and try to unsatisfactory to both parties and the uncertaintly of a court case could be avoided by agreeing upon lease terms. One way in which the landlord can regularise the position is to serve a written notice under section 25 of the 1954 Act terminating the tenancy and stating whether or not the landlord is willing to grant a new lease and if so on what terms including rent and length of lease. If the landlord opposes the grant of a new lease, then it may only refuse on certain grounds set out in the statute, most commonly refusal on the grounds of persistent rent arrears, being able to demonstrate an intention to occupy the premises for its own use or an intention to redevelop. The landlord must demonstrate the ability to do these things if necessary by producing plans and specifications and the necessary planning permissions. This can make it difficult for a landlord to regain possession. If the tenant is a protected business tenant and the landlord does not have grounds to oppose able to obtain a new lease on terms to be agreed or if not agreed as determined by the court. Accordingly the landlord cannot simply impose any terms it wishes and the court will look at the implied terms of the periodic tenancy when considering what terms should be inserted in the new lease. The landlord is therefore likely to be agreeable to grant a lease to a periodic tenant especially since it cannot increase the rent without first terminating the lease under the Act, and the position will remain uncertain. Taking legal advice It is best to seek legal advice first before finalising terms in principle with your landlord to ensure that the terms of the new lease are not onerous and reflect the terms of your existing oral tenancy. Where there is a dispute with the landlord and the landlord is taking steps to terminate the tenancy without offering acceptable new lease terms, it will be important to seek legal advice as to your rights and how to protect your position. The impact of Coronavirus on businesses has led to increased activity from owners of SMEs looking to sell. It is important to offer flexible terms to make your business look attractive. The same general principles apply to most SME businesses. Heads of Terms are important Be clear what it is you are selling and consult your professional advisors in advance. It is of course important to get your accounts and financials in order and include detailed forecasts where possible. Preparing heads of terms is also important offering flexibility which will be more attractive to buyers. What exactly are you selling? Consider if you selling the shares or just certain assets. There are pros and cons with each. By selling the shares, the buyer will pick up the liabilities of the company. Transferring assets may be simpler but one added complication can be obtaining landlord’s consent to transferring a lease. Assets may be preferable if the business is not eligible for Covid 19 Government assistance. Either way, the type of sale is usually determined by tax considerations. One issue is to avoid the tax ‘double whammy’ for individual shareholderscorporation tax on the chargeable gain on the sale of the business, on top of income tax on the distribution of the net proceeds as dividends. The usual way round this is to claim Business Asset Disposal Relief (formerly Entrepreneurs’ Relief). If the company is a trading company the seller can benefit from a capital gains tax (CGT) rate of 10% on qualifying assets owned for at least 2 years. Structure the sale price: Capital vs Income The impact of Covid-19 on trading is such that you need to consider offering more flexible deals to buyers. A Seller’s willingness to continue in a consultancy or employment role after sale may assist in maximising the price. Consider also taking non cash consideration, usually in the form of shares in the purchasing company. You may be able to achieve a greater sum overall if you consider deferred payment of the consideration over a period of time or an ‘earn out’. Alternatively, consider a joint venture agreement with the buyer whereby the risks of future trading can be shared. Which assets are you selling? Include those assets which are necessary for the smooth running of the business as part of the sale. A seller might exclude a freehold property or any intellectual property rights and licence their use to a purchaser thereby maximising the return on such rights. Employees’ rights and reducing the workforce The rights of employees are protected under the Transfer of Undertakings (Protection of Employment) Regulations 2014 (TUPE), in the case of a ‘relevant transfer’. The rights of those employed immediately before the transfer will automatically be transferred to the buyer. Consider the need to make an ‘economic, technical or intending change to the workforce’ (ETO) before or after the relevant transfer, so that the employee will not be deemed to have been unfairly dismissed. The reason for the ETO must also involve changes to the workforce: the number of employees involved. Genuine redundancy would be a valid economic reason. A technical reason might be a lack of appropriate skills, while an organisational one would perhaps be the need for a reduced combined workforce. Restrictions on the seller No restrictive covenant is implied, so be prepared to offer an express clause in the sale contract. The reasonableness of a restriction will be tested against the geographical area to which it applies. This is based on the geographical distribution of the business’s customers at the time of purchase. If you need expert legal advice, please contact Alan Zeffertt by email on azeOur expert commercial solicitors will be pleased to advise. @anthonygold.co.uk or ask for him or a member of our Commercial Property Team, telephone 020 7940 4000.Please contact Alan Zeffertt if you would like assistance: alan.zeffertt@anthonygold.co.uk
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