You've Got A Deal: Heads of Terms - Part 6 (Dark Stores Focus) - Boodle Hatfield

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18 Aug 2022

You’ve Got A Deal: Heads of Terms – Part 6 (Dark Stores Focus)

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Katherine Worrall View profile
4 min read

This is the sixth, and final, post in a series discussing the key points to be considered when negotiating heads of terms. In line with the other five (onetwothreefour and five), whilst our discussion is tailored to dark stores, the points raised will be equally applicable across other asset classes.

If you are currently negotiating heads of terms (whether for a dark store or not) and would like to discuss any of the points raised in this series, or indeed any that are not, then please do get in contact with one of us (Sophie & Katherine).

Do also be aware that the series has been looking at key pure property points and that there will be various other matters to consider. The most important (arguably) of those being tax consequences, particularly for tenants who will be liable most obviously for (a)  SDLT on the grant of the lease and (b) VAT on the rents due under the lease (if the landlord has opted to tax).

  • Assignment - To assign a lease means to transfer it to a third party.

A tenant will want maximum freedom and flexibility to dispose of its lease as this will enable it to act quickly if premises become superfluous to requirements as the tenant will then no longer need to pay rent or comply with the other lease terms.

The landlord, by contrast, will want control over the assignment process. Whoever the lease is assigned to will be its tenant and so it will want to ensure that incoming tenant has the covenant strength to be able to pay the rent and comply with the other lease terms. Landlords will typically therefore include clauses in the lease which mean a tenant cannot assign without landlord consent and which enable the landlord to require (as a condition of assignment) (a) a guarantee from the outgoing tenant, (b) a guarantee from a third party and/or (c) a rent deposit. Landlords will also want to prohibit any assignment when there are breaches of the tenant's obligations under the lease so that those breaches are not waived by completion of an assignment.

Being able to dispose of a lease easily is particularly relevant in the context of dark stores, where the expectation is that the sector will continue to see consolidation between competitors. Where a consolidated provider finds itself with multiple properties in similar locations, it will most likely want to get out of at least one lease. If the term of one lease is not due to expire soon or cannot be terminated using a break right, the next best thing will be to assign the lease to a third party.

  • Underletting - An alternative way for a tenant to mitigate its rent liability is to underlet the premises. This is often seen where the market rent for premises is less than the passing/current rent under the lease, making assignment of the lease tricky as no third party wants to take on the higher contractual rent. It is also seen where a tenant wants to reduce (but not eliminate) either its rent liability or the space it uses by underletting part to a third party. 

If premises are underlet then whilst the tenant will still be on the hook under the lease (ie: it will remain the landlord's direct tenant), the landlord will still likely want control over the underletting process. There are two main reasons for this (a) because if the lease is forfeited, the undertenant could become the landlord's direct tenant and (b) any rent set in the underlease will be a market comparable on rent review under the lease.

The landlord will consequently want to ensure that the underlease is on terms no less onerous than the lease, will want to limit the number of underlettings of part that there can be and will want to ensure that the rent in the underlease is reviewed to the open market value. Note that some landlords will try to ensure that the rent in the underlease is set at no less than the passing rent under the lease - this is often a source of contention between parties as it could prevent the tenant from underletting in a declining market. 

  • Group Sharing - Often tenants set up a company to acquire properties and take on leases, with a separate company actually trading from those premises. For this reason it is very normal to see provisions in a lease permitting a tenant to share occupation with a group company.  Landlords usually do not have any difficulties with such a provision but should ask that they are kept informed as to who is occupying the premises in practice under such an arrangement. 

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