Encore Episode: Read the F*#!*"#! Lease – Why Every Business Owner Should Know Exactly What They Signed

Encore Episode: The Importance of Reading Your Lease (RTFL!) for Retail Tenants – and Your Contracts and Legal Agreements for All Types of Businesses 

In this encore episode of That Retail Property Guy, prompted by a non-retail listener who’d found this episode useful in his business, host Gary Marshall underlines how it’s necessary for all businesses to read, know and understand their contracts and legal agreements. He delves into fundamental lease management practices including the significance of knowing the legal tenant, understanding key dates and recognising the implications of landlord consents and repairing obligations. Gary shares valuable insights and anecdotes that highlight how understanding every detail of a lease, including clauses, conditions, and associated documents, is essential for effective estate management. He introduces the concept of RTFL (Read the F!* Lease) to underscore the necessity of thorough knowledge to avoid costly mistakes and maximise commercial opportunities. 

00:00 Introduction to That Retail Property Guy

00:22 The Importance of Reading the F###### Lease (RTFL)

01:08 Understanding Lease Documentation

01:52 Key Lease Clauses and Their Implications

04:32 Landlord's Consent and Demise Extent

05:38 Alienation and Repairing Obligations

06:24 Case Studies and Real-World Examples

12:19 Conclusion and Final Thoughts

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Transcript

0:00

Welcome to That Retail Property Guy with your host Gary Marshall. In each podcast episode, we delve into topics relating to the particular overlap between estate management and accounts payable from the perspective of a retailer as tenant. Sharing stories and insights through Gary's unique lens, we hope you'll be entertained, enlightened, and maybe a little inspired. In this episode, we're talking about one of the most fundamental basic estate management concepts, which is to read the lease. The usual acronym is RTL. Earlier in my career, an estate manager colleague gave me the best advice ever. RTFL, which is the same basic acronym, but a bit more forthright. I'm sure you can figure it out. He explained that patients can wear thin when continually faced with assessing the work of a colleague Who should know the answer to a question, but repeatedly asks it anyway. Or who frequently proposes an incorrect solution to a challenge, simply because they don't know what they should know. So you'll hear me reference that point many times in these episodes. RTL, or in exasperated cases, RTFL. I'm talking about reading the actual lease, of course. Not a lawyer's summary, not a template from a database, not somebody else's quick opinion. The book stops with you. Always check your documentation back to the original source to know exactly what the position is. An RTFL doesn't just mean the lease. It includes any subsequent deed of variation, side letter, personal concession. You need to understand their extents and limitations and how these impact on the original lease. For example, is any clause in the lease or a subsequent document personal only to one tenant, not transferable if the lease is transferred? Don't assume. Never take it for granted. Always know exactly what you're dealing with. Many retailers are still trading from leases granted in the tail end of the 1980s or 1990s, and commercial practice has moved on a long way since then. So a modern lease might be very different, and the modern expectation might be different. Some old lease clauses might seem archaic, but they're still legally binding, so it's good to know. No, it's essential to know exactly what the lease allows. This is important from a landlord's or a tenant's perspective, though of course for the purposes of these episodes, we always champion on behalf of the tenant and think of the landlord like some dastardly pantomime villain. Boo! Commercial practitioners specialising in property must be aware of the legal and literal contract between the parties and not make assumptions based on a generalisation. It's not uncommon for these generalizations to be squeezed into a database, which simply doesn't allow scope for exceptional free flow text, or to be bundled into categories that don't really stretch to the idiosyncrasies of this particular lease. You need to fully understand the extent and limitations of the lease. You need to know the name of the actual legal tenant, just in case that could cause an embarrassment when approaching a landlord for consent. You need to know the expiry date, the review dates, any break dates, any conditions or penalties which you associate with those breaks. Don't get caught out with an invalid notice that leaves the tenant stuck with an unwanted lease for the remainder of the term when they expected to be rid of it right now. You need to know if the lease is protected within the scope of the 1954 Landlord and Tenant Act or contracted out. Okay, this is more pertinent to tenants in England and Wales than in Scotland and we'll delve into it in more detail in another episode. You definitely need to understand exactly what the permitted user clause allows. More on this in another episode. There may be restrictions in Which really limits the tenant's proposed business expansion plans or an expected disposal by assignment. And on the contrary, there might be a very wide user clause with sufficient scope to make this specific property very different to any others, which are being used as comparables in a valuation exercise. It's important to know whether any of the sub processes in the lease, like rent reviews or break options, which have date deadlines. Are subject to a time of the essence condition, where certain events will fail or occur by default, if the tenant doesn't act or respond by a particular date. Don't let a tenant get stuck with a ridiculously high rent proposed by a landlord just because you didn't notice that the lease only gives the tenant six weeks to formally respond to reject that proposal. It's important to understand the concept of landlord's consent. Does the lease provide that certain changes will require the landlord's consent? And this could include shop fitting or signage changes, changes in use, new signage on the totem pole, or of course, a proposal to dispose by assignment or underletting. Then, is that consent also qualified as to be not unreasonably withheld? What constitutes a good reason for the landlord to withhold? Is there a material risk in not getting consent, or would you see this requirement as a mere detail? It's important to note also the extent of the demise. Are we talking about a retail shop bounded by four walls? Is it ground floor only? Or are there other floors? And are they self contained? Can they be sublet separately? Is there any restriction in their use? Is there a dedicated yard out the back? Or a shared service yard with rights of way which are used in common with other neighbouring retailers? Is there dedicated parking for anything, whether for customers or service vehicles or electrical charging points? It's critical to understand the extent of any alienation clause, which of course is the tenant's ability to dispose of the property or part of the property. Can it be assigned? Can it be under let? Can it be partly sublet? Is landlord's consent required? And could it be withheld? Are there conditions? Are they reasonable? Can the tenant comply or is litigation likely? One major area to be focused on is the repairing obligation. You should know if the lease is FRI, Full Repairing and Insuring, or IRI, Internal Repairing and Insuring. Is there a schedule of condition limiting the extent of any need to repair? We're all aware of urban myth about tenants who have repaired at great expense beyond their obligations. I recall one complicated example of this. The situation was a very old building in a very established high street. All the buildings in the street were old. The structure of this building was once mostly wood frame, but now could best be described as woodworm holding hands. The building sank in every direction. The floors were not level. If you dropped a coin or a marble, it could have rolled away in any direction. The roof undulated like a roller coaster. The gutters and the downspouts were thick with vegetation. There was a tree growing out of the gutter at one point. Inside the attic space was the most bizarre contraption, basically a scaffold frame supporting a big tarpaulin that reached out to all corners under the roof to harvest the water that came through between the tiles. The rainfall didn't reach the regular gutters, it seeped through the roof, dripped onto this tarpaulin, which gathered it, and at the lowest point, someone had then attached a drain outlet, connected to a 50mm pipe, that eventually led to a connection on a lower floor, where a toilet used to be. A visiting building surveyor, acting on behalf of the client, saw this in horror, and immediately set about designing and costing up a new roof, guttering and drainage system, and extensive supports to the roof timbers. But wait. Luckily, the story behind this store was pretty well known. The estate manager had read the lease and the associated schedule of condition that confirmed the tenant's repair liability as excluding the roof. Strangely, it also excluded it from the landlord's repair liability. The roof existed, But nobody was responsible for it, as it deteriorated year on year. The estates guy was able to restrain the visiting building surveyor. Bizarre though it was, this Heath Robinson system was the optimal solution. And with lease expiry on the horizon within five years, no extra spend was required or approved. But imagine if the estate manager hadn't read the lease. And you might think that all of these areas of critical knowledge are a bit excessive, that you really only need to know the answer to any specific question when the specific question arises. Can we sublet? Oh, let me check. But that's not entirely the point. All of these lease obligations act towards the value of the lease. So it should be factored into any consideration at rent review or in any rating assessment or when considering a substantial investment or arguing any point with a landlord. Each obligation doesn't exist in a vacuum. The lease is the sum of its parts and you have to know that sum in order to effectively manage it. Is this lease identical to the neighbouring lease which the landlord is citing as a rental comparable? And if it's not identical, is it more or less restrictive? Should the value be higher or lower than the comparable? Another example, a retailer occupied a quaint store in an old market town. Once upon a time it had been a ladies hat shop. The shop front was a fabulous art deco masterpiece, with panes of curved, sculpted glass, creating a tunnel like display gallery leading towards the entrance door, which itself was set back about 10 feet from the street. You can easily imagine the ladies of the 1930s standing in that gallery, browsing the finery in the display windows before stepping inside. The gallery was clever. It gave the retailer twice as much shop window as the regular width of the shop would allow for a normal flat shop front. Twice as much window, twice as much goods on display, twice as much temptation. But of course, the tunnel itself, the walkway between those windows, little more than four feet wide, that's one metre twenty, was of limited use. Sure, it allowed the visiting ladies to browse the displays, but you couldn't put any stock in that gallery. It was a passageway, not sales space. So jump forward fifty, sixty years. A modern retailer now has the lease. They use the same windows for the display of goods. Their customers enter the store through the same doorway. Quaint. And then the first rent review under the lease. And the question of how to value that space. Okay, we can discuss valuation principles, usable floor space, and applying a rate per square foot, or meter, in another episode. But for this moment, let's just say, the landlord's valuer had just granted a new lease on a nearby property. They expected to apply a similar rent to this shop, except the nearby property had a modern flat frontage. So all the space, from the moment a customer stepped off the high street, was valuable sales space. Not so for the Art Deco shop. The landlord's valuer argued that the tenant could easily rip out that Art Deco frontage, put in a new modern front, and so should pay the same rent. Except the tenant's estate manager had read the lease and all the associated documents. They knew that the Art Deco shopfront was listed so couldn't easily be removed. They also knew that any alterations would be defined in the lease as tenants improvements, and that the lease specifically excluded the benefit of any tenants improvements from being valued by the landlord. So, a much better solution was agreed, a lower rent than the landlord had proposed, to the tenants advantage. Knowing the lease in detail from first hand knowledge based on personal research can pay dividends. Nobody wants to get caught out because they missed something. And nobody wants to miss out on a commercial opportunity because they didn't know something to their advantage. So, RTL. RTFL and read all the associated documents too. Thank you for listening to That Retail Property Guy. I hope you enjoyed today's discussion and found it both entertaining and insightful. Don't forget to explore more episodes and if you have ideas for future topics, feel free to share them below. Be sure to like, share, and subscribe so you can never miss an episode. For more information, visit ThatRetailPropertyGuy. com. Thanks again for tuning in!