Pre-letting agreements, Part II - The landlord’s perspective

Assignment

This can, in certain circumstances, be both a tricky and contentious area. A landlord will want to think very carefully as to its future plans. A number of possibilities may arise. It may be necessary for taxation and other reasons for the agreement to be assigned by a landlord within the existing group of companies. Alternatively, a landlord may need to obtain funding in order to develop the property and a funder may require that a special purpose vehicle is set up to own the property. A landlord may wish to forward sell the investment. These possibilities must be catered for in the agreement.

A tenant is likely to be unhappy that an agreement may be freely assignable by a landlord. The tenant may be relying on the specific covenant of a landlord to develop a property and stand behind the contractor and other professionals covenant in procuring a completed building. Careful consideration should also be given to the position of the contractor and the other professionals on an assignment.

In practical terms, a solution often negotiated is that a landlord shall be permitted to assign the benefit of a pre-letting agreement subject to a tenant's consent, such consent not to be unreasonably withheld or delayed. An alternative is for a landlord to remain personally liable for observing and performing the obligations under the terms of a pre-letting agreement whilst being permitted to assign the benefit of the agreement and the property to a third party.

A landlord will be most concerned to make sure that its tenant is not permitted to assign an agreement. Having negotiated development and subsequent letting of the property at a market rent to a tenant a very significant factor in the landlord's strategy for the building will be reliance on the specific tenant's covenant. Any dilution of this would be a very material factor affecting a landlord's investment at the end of the day.

Disputes
It is important that thought is given to the most appropriate way to resolve any difference or disputes that might arise under the terms of an agreement. An example of this is in dealing with the mechanism used on practical completion of the property. A landlord will want to control certification of practical completion. If a landlord permits a tenant to influence the certification of practical completion, a landlord will want to make sure that any referral to an independent expert or arbitrator is within a very short time period with provision for a decision within a similar time frame. Lengthy delays in a certificate of practical completion being issued could have disastrous financial implications for a landlord.

Careful consideration should be given as to the appropriate party to adjudicate any dispute. The likely areas of dispute are over construction issues, measurement of a building or interpretation of the agreement. In appropriate cases, reference should be made to separate experts who are qualified to adjudicate on a specific type of dispute that are likely to arise.

Early access
In theory, a landlord will undertake to construct the building to whatever standard is agreed in the pre-letting agreement. Only when these works have been practically completed, a tenant will commence its fit-out. In practice, tenants are often anxious to commence fit-out well before a building has been practically completed. A landlord will want to carefully regulate within the pre-letting agreement the basis upon which a tenant can carry out works. There is an obvious practical danger of interference with the landlord's works with two different contractors working on the same building. The issue of the rent commencement date will need to be addressed, as this is obviously tied to practical completion of the building. A landlord must include express provisions in the pre-letting agreement prohibiting the tenant from effectively taking up occupation and commencing trading from the property as a result of being permitted into the property by way of early access. The practical arrangements for early access are a potential area of some difficulty for landlords and extreme care is needed in drafting a pre-letting agreement to preserve the landlord's objective of completing its works as soon as possible to practically complete the building.

Physically a landlord may not be able to facilitate early access to the tenant. The drafting of an agreement should reflect the landlord's discretion to permit early access but not place the landlord under a contractual obligation conflicting with its building obligations.

For further information please contact Jon Vivian on 0171 367 2116 or by e-mail at [email protected].