Leasing business premises can be a real minefield for the unwary business owner. In this series of posts I shall go through the various aspects of a commercial lease to explain some of the legal jargon and also provide some lease negotiation tips along the way.
C is for Covenants
The word 'covenant' is used in two very different contexts in relation to commercial premises.
'Covenant' usually refers to a promise made by either the landlord or the tenant (or the guarantor if there is one). The repairing covenant in a lease, for example, is the promise by the tenant to keep the premises in the standard of repair set out in the lease.
'Covenant' can also be used to describe the quality of a tenant. A substantial tenant with significant assets eg a blue chip company would be described as 'a good covenant'. This is because it is seen as less likely to breach its promises in the lease (in particular the promise to pay rent) than a new company with few assets which is more likely to fail.
If you are looking to take on a lease; sell (assign) an existing lease; or sublet then your landlord will want to see some evidence of the 'covenant strength' of the new proposed tenant. A landlord is entitled to ask for trading accounts and references for the proposed tenant as this provides a good indication of the strength of the business and therefore the strength of the promises it makes as a tenant.
The covenant strength of the proposed tenant should also be of concern to you if you are selling your lease or subletting. In the case of a sale (assignment) of a lease, you will almost certainly be required to enter into an Authorised Guarantee Agreement under which you agree to stand as guarantor for the new tenant. It's very much in your interests to ensure that you only sell to a tenant with the financial strength to meet the ongoing liabilities under the lease.
If you are subletting, you will still be liable for payment of the rent under your lease to the landlord and will be collecting the rent payable under the sublease from the subtenant. In some ways it is even more important to establish the covenant strength of a subtenant as you will be responsible for enforcing any breaches of the sublease against the subtenant.
Look out for the next instalment - D is for Dilapidations
For further advice on commercial premises contact me on 01926 629005.
Steven Petty, Commercial Property Solicitor
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.