Good estate management is key to the success of a shopping centre, with a landlord being particularly keen to ensure an optimum tenant mix, which brings obvious benefits to both a landlord and its tenants. To promote this, landlords require flexibility and one of the legal tools available are offer-back provisions (also known as surrender provisions). This article analyses these provisions and some of the complex issues that arise in their operation.
Definition
Offer-back provisions in a lease require a tenant first to offer its lease to its landlord if it is either considering assigning or where it has actually found a prospective assignee and wants to proceed. An offer-back helps protect a landlord in relation to turnover or zoning, while recognising that a tenant needs the certainty of a workable timetable at the end of which it is free to dispose of its lease.
Generally, offer-back provisions allow a landlord a prescribed period of time – usually triggered by service of a notice by the tenant – in which to decide if it wants to take back the lease. If a landlord decides to accept the offer of surrender, the clause should provide the mechanism for how this is to occur. If a landlord does not want to accept the offer then the tenant is free to assign to its buyer (subject to the usual caveats found in any commercial lease).
Surrender or assignment?
An offer-back provision can create an agreement to surrender that arises when a landlord accepts the offer to do so. This creates a tension where offer-back provisions are used in conjunction with tenancies that confer security of tenure. This is because of requirements under the Landlord and Tenant Act 1954 that arise when certain agreements to surrender are made.
In practical terms, though, this should not matter; there may be commercial reasons to include an offer-back in a protected lease. Where a tenant wishes to extricate itself quickly from its relationship with a landlord, it may welcome the opportunity to surrender quickly rather than deal with a generally more protected assignment to a third party.
It has been suggested that by structuring an offer-back as an assignment (to the landlord or its nominee) rather than a surrender, it might avoid triggering those statutory requirements. Commentators have expressed the view that this is unlikely: any court looking at the enforceability of such an arrangement would consider the substance rather than the form of the deal.
Underletting or assignment?
One way a tenant might avoid controls fettering assignment (so bypassing the offer-back altogether) is to structure the deal as the grant of a sublease. For this reason, it may be prudent for a landlord to insist on an absolute prohibition against subletting. One alternative might be to make the offer-back a precondition to any subletting.
It is important to note that if a lease contains a rent review mechanism that operates by reference to market value, an increase in the restrictions in the lease (for example, a prohibition on subletting) might depress rent on review. This can be managed by ensuring the disregards in the rent review clause are drafted appropriately.
Agreement properly protected?
A landlord will want to ensure that following a permitted assignment any incoming tenant is similarly bound by the offer-back provisions. In the case of a registered lease, protection is conferred through either completing the prescribed clauses correctly or, failing this, a separate application to the Land Registry to note the provisions against the tenant’s title. There are different requirements if the lease is not registered at the Land Registry.
Terms of surrender
An offer-back provision should set out the terms on which a tenant will surrender its lease. This should include addressing the extent to which a tenant is released; for example, a landlord will want to ensure that any surrender is without prejudice to pre-existing rights and liabilities whether vacant possession will be given, or a premium or reverse premium is payable. The position of any guarantors or occupational interests will need to be considered before surrender.
Inevitably, an offer-back clause will set out a timetable that includes various time limits for, among other things, acceptance of the offer of surrender and completion of assignment to a third party. This timetable should allow both parties certainty both in terms of the surrender and, failing that, the assignment.
Landlord and Tenant Act 1988
A tenant also has the protection of this legislation. Where a tenant makes an application for consent to assign that is subject to the assignment provisions satisfying the requirements of the 1988 Act, a landlord must comply with statutory obligations regarding provision of consent within a reasonable time.
That obligation runs from the point at which the tenant makes its application. The offer-back provisions should confer on the landlord a degree of contractual breathing space to enable it to consider fully the proposed surrender prior to dealing with the application to assign. In an ideal world, an offer-back provision would make it clear where it fits into this statutory framework.
Best practice
The recently launched Property Protocols website (www.propertyprotocols.co.uk) aims to promote best practice on applications for consent to assign or sublet. Its Protocol for Applications for Consent to Assign or Sublet is a helpful ready reckoner that identifies some of the steps that the parties will need to consider when making such an application.
A great many deals involving retail leases require the parties to grapple with the rights and obligations arising in offer-back provisions prior to, or as part of, the application process. More awareness of their complexity and guidance as to their operation and interaction with other lease provisions and statutory requirements is to be welcomed.
Nick Knapman is a partner and Matt Stokes is a professional support lawyer at DAC Beachcroft LLP
