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Legal
Can a periodic business tenant in occupation of premises obtainSHARE BUYBACKS a lease from their landlord? You are a commercial tenant running a business from - how to buy out a premises and you now want your a written lease for a fixed term. Shareholder landlord to grant you
Alan Zeffertt Consultant
You may have been paying rent lease, perhaps in order to grow resolve the disputeWhen a director/shareholder in a SME A share buyback is where the company which could be a new lease, the tenant• be substantially reducing the will be monthly or quarterly for some or sell yourwants to leave, it is preferable for their business, you will not unsatisfactory to bothpurchases the shares at an agreed price. parties and able to obtain a new leaseshareholding by over 25%; and on 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 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 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 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 shares to be sold to the company or the remaining shareholder/s who will continue to run the business. The shareholders will usually ask the company’s accountant to advise on the value of the shares. Once a price has been agreed, the question is whether the company will buy back the shares, or the remaining shareholder/s? Selling shares to the remaining shareholder/s is simpler than a company share buyback, but there may be tax benefits in structuring the deal as a company buyback. Share sale or share buyback? With a share sale, the selling shareholder will simply sell to the purchasing shareholder for the agreed price. This could be a lump sum payable on completioin or In order to do this, company law rules must be followed otherwise the directors can be found liable for breach of their duties and HMRC can deny favourable tax concessions for the shareholder. Funding for the transaction must come from the company which must have sufficient distributable reserves to fund the share buyback. If the funds are not paid from distributable reserves, liabilities can arise. Funds can come from retained profits or capital or borrowings. Tax issues If a shareholder sells their shares to the company, then the shareholder may be charged income tax. The profit on the sale is treated like a dividend. However, in certain circumstances, the shareholder may be charged capital gains tax. • hold under 30% of the issued share capital. Another condition is that the buyback must be for the benefit of the company’s trade (or to pay inheritance tax from a death). In order to check whether these conditions will be satisfied, it is usually advisable to apply to HMRC for advance clearance that the buyback will qualify for capital gains tax treatment. Company law procedures The main company law requirements to be dealt with for a buyback of shares include: • A contract for the share buyback between the Seller and the Company. • Board minutes to approve the share buyback and payment for the shares. 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 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 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 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. structured as a payment over a period of time, or could be linked to future profits of the company, as an earn out. Funding will come from the purchaser and if the purchaser is an existing shareholder, their individual shareholding will increase. The requirements for HMRC to treat the share buyback as capital are that the seller must: • have owned the shares for over 5 years; • be selling all their shareholding; or • Directors statement where payment is made out of capital. • A resolution of the shareholders. • Stock transfer form transferring the shares.
