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Restructuring leasehold portfolios - Q&A


Covid-19 created a global pause for all of us.  As lockdown in the UK eases, many companies are now taking stock of lessons learnt in the crisis. This includes reviewing their current exposure to real estate and their anticipated property requirements in the longer term.

This is particularly prevalent in the office occupier sector. Lockdown has proven that, with the right investment into technology, companies can efficiently run from home. With good communication in place and a strong sense of culture, teams need not be sat in the same location to work together efficiency.

Covid-19 arrived at a time where many companies have already invested heavily into their IT infrastructure and where most staff have access to high speed broadband at home in an affordable way. This makes longer term working from home not only achievable, but in some cases more desirable when the cost savings of a reduced office footprint are considered.

Real estate costs, along with staff costs, often represent the most significant single fixed balance sheet item for companies.  In tougher markets, a relatively small reduction in turnover means that these fixed costs really go to the bottom line.

In this Q & A, we take you through where to start if you are considering restructuring your current office leasehold portfolio.

What do my leases say?

Can I exit my lease without having to involve a third party?

The first place to start is to check the remaining length of your lease and whether there are any contractual rights for you, as tenant, to break the lease early.

You will need to check the conditions of any break right carefully.  It is usual for breaks to be exercisable on a specified number of months' notice, conditional upon the yearly rent and service charges due up to the break being paid in full and for vacant possession to be delivered on the break date.

The lease itself will normally specify requirements for serving the break notice. Once you have decided to exercise the break, you should engage a solicitor to prepare the break notice.

Can I ask my landlord to accept a surrender of the lease anyway?

Yes but, as a surrender is a consensual process, you cannot unilaterally require a landlord to accept a surrender and it will be entirely at the landlord's discretion whether to agree to this and, if so, on what terms.

In a market where office space is less sought after, it is likely to be more challenging to secure a landlord's agreement to proceed with a surrender (unless the landlord has other plans for the space).

Depending on the remaining lease term, a landlord is likely to ask for a premium to be paid in return for accepting a surrender and releasing tenant covenants.  This is known as a reverse premium and is generally not subject to SDLT for either the landlord or the tenant (but can be subject to VAT).  The level of the reverse premium is often reflective of the landlord's assessment as to how long they expect the premises to remain vacant, taking into account loss of rent and rates exposure for that period.  In challenging reletting markets, surrender premiums will be higher on that basis.

I have no contractual breaks, but there might be interest in the market from a third party for the space. Can I essentially sell the lease?

Most leases of office space will permit some alienation.  This will commonly be either a right to assign (i.e. transfer) the lease, or to underlet the premises (in whole or part), to a third party. 

It is usual for the landlord's consent to be required for either an assignment or an underletting.  Ordinarily, the landlord's consent is expressed so that it cannot be "unreasonably withheld".  This means that the landlord must provide "reasonable" grounds to withhold consent.  Some leases will specify certain conditions that a landlord is entitled to require and will be deemed to be acting reasonably, if they do.

What are the primary factors to consider on an assignment?

  • Engaging a property agent will assist you to market the lease and they will be able to advise you as to the terms you are likely to achieve, for example, whether a purchaser would pay a premium for the lease.

  • When a potential purchaser has been identified, the deal will mostly likely be conditional upon the landlord's consent being obtained. The assignment provisions of the lease need to be carefully checked to ensure any relevant conditions are complied with. Some leases contain a right of first refusal (or pre-emption right) for the landlord.  Where this applies, the proposed deal for the sale of the lease must generally be offered to the landlord before the sale can proceed.

  • The covenant strength of the purchaser and their ability to comply with the tenant covenants in the lease for the remaining lease term (particularly the payment of rent and meeting repair obligations) will be key to a landlord. A landlord will often ask to see a trading history for the proposed purchaser of at least three years.  Covenant weaknesses can sometimes be made up for with a parent company guarantee, rent deposit or bank guarantee.

  • It is usual for leases to require the outgoing tenant to guarantee the new tenant's covenants in the lease, under a document called an authorised guarantee agreement (an "AGA"), for so long as the purchaser remains the new tenant. This needs to be considered in the context of the purchaser's covenant strength, their risk of default and whether you are comfortable with keeping residual contingent lease liabilities within the original tenant entity. Some AGA's can permit the landlord to ask the previous tenant to effectively take back the lease, if the new tenant enters into an event of insolvency.  Where an AGA is given, the lease is not therefore fully "off balance sheet".

What are the primary factors to consider on an underletting?

  • Underlettings are usually be less desirable than an assignment because the original tenant remains contractual on the hook for rent and other lease liabilities to the landlord. These liabilities are passed down to the sub-tenant but this means that there is reliance on the ongoing covenant strength of the sub-tenant.

  • The terms and conditions for the landlord's consent and any associated rights of pre-emption must also be checked, as in the case of an assignment.

  • Many leases specify that a sub-lease must be granted at least at the level of rent in the primary lease. This can present difficulties in a falling rental market where the market rent is not as high.   

If I am unable to exit my lease, are there other options?

Although a landlord cannot be required to agree to variations in a lease, it can sometimes be useful to open a discussion with your landlord with a view to changing certain parameters that might make the lease more viable for you over the medium to longer term.

This can include:

  • New rent frees, rental reductions or fixing an upcoming rent review to a level of rent that can be managed; and/or

  • Inserting new tenant breaks in the event that the space is not viable in the medium term. This might be in return for the payment of a break premium.

Variations to the lease, particularly rent reductions, will be assessed by a landlord in terms of effect on their residual values and against their own financial commitments. Where rental variations are agreed, it is often in return for an extension to the overall lease term or removal of a tenant break (although this is not always the case).

Formal restructuring

There are many current examples of company voluntary arrangements (CVA's) in the marketplace designed to deal specifically with leasehold liabilities. We are frequently asked whether this might be an appropriate mechanism to restructure leasehold portfolios in the office sector.

Whilst a CVA can be used in any sector to compromise lease liabilities, formal insolvency processes are more time consuming and costly than utilising existing mechanisms to exit a lease contained within the lease itself. 

It is important to remember that an insolvency process such as a CVA is supported by an insolvency practitioner who must be satisfied by a counterfactual that the entity placed into the process will face administration or insolvency if the CVA is not put in place. The estimated outcome of the CVA must show that unsecured creditors will receive more overall via a CVA, than in the alternative administration.

A CVA is a public document and filed at court. The launch of a CVA has PR consequences that would need to be considered, both in terms of current business relationships and future opportunities.

For these reasons, formal insolvency procedures such as a CVA are often unlikely to be worthwhile unless there are a significant number of leases to exit and a genuine solvency concern for the entity in question. Even then, the group should be prepared to defend funding decisions for the relevant entity, particularly if other group companies are performing well or if additional shareholder funding or bank debt are seen to be viable alternatives to support the company in question.

Soft restructuring

It can still be helpful to analyse the leasehold portfolio in the way that you would prior to launching a CVA or other insolvency process.

Normally, this involves undertaking a 'bucketing exercise' where each lease is assigned a category from Green (viable without needing changes to the lease terms), to Amber (viable if certain rent reductions can be met or if the term length is reduced) and finally Red (not viable, no matter what variations to the lease could be secured).

Alongside the consensual steps discussed in section 2 above, or as a longer term exercise, you could consider if there are corporate steps that would improve the medium to longer term positioning for your leasehold portfolio.

Factors to consider are:

  • In which corporate entities do the leases currently sit; are they the core trading entities or subsidiaries that could be easily ring-fenced?

    If the entity where most leases currently sit is not a key trading entity to the business, it might be sensible to consider, over the medium term, assigning Green and Amber leases to a separate group entity (subject to securing any landlord consent required). 

    This can present more options in the future as to how to deal with the Reds and historic lease liabilities in the old tenant entity. 

    Group relief is ordinarily available on any SDLT liability for transfers of property intra group. Although this can be clawed back if the assignee is subsequently transferred out.

    However, it is important to ensure that a fair value is accounted for in respect leases transfers, to avoid clawbacks under insolvency legislation in the future.

    Consideration would need to be given as to the best way to satisfy that consideration, for example inter group company loans or distributions, plus their tax treatment.

  • What is the cross-guarantee position affecting the group?

    If other members of the group have guaranteed lease covenants, consideration needs to be given as to the long-term effect on those entities if a future insolvency process is undertaken to deal with Red leases. Lease liabilities might come back to the guarantor, meaning that they have only been moved around the group and not extinguished from the group.

    When placing a guarantor entity into an insolvency process, this can often trigger a right for a landlord to forfeit the lease that the guarantee relates to, even if the tenant is unaffected (subject to rights of the tenant to apply for relief).

    Where possible, it would be sensible to seek to replace guarantees with other forms of security to try to reduce the group's exposure to these types of claims.


There are many reasons why companies would want to consider a restructuring of their current leasehold portfolio and rental exposure.

Whichever route is pursed by a company and whatever its needs, restructuring a portfolio takes time and money. A useful first step can be to analyse the portfolio from a viability perspective to obtain an initial categorisation. This helps to focus the attention away from the sites that are low risk, towards the sites that either require a re-gear to be viable longer term, or which the company needs to ultimately exit.

Whether a company can meet its desired objectives through landlord conversations alone depends on the market conditions and the individual landlords in question. However, this can often be a sensible place to start, whilst considering longer-term corporate restructurings for the future should it be needed.

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