Surplus Leasehold Liability Disposal

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Client:

Financial Services firm

Brief:

To dispose of a surplus leasehold property which comprised ground, first and second floors.

Services requested:

To mitigate risk and minimise cost of surplus retail property in Newcastle with five years remaining.

Solution provided:

The property was part sublet to multiple coffee shop operator, with a lease on half the ground floor and the whole of the second – connected by an external staircase. The remaining ground floor and first floor space was vacant. The headlease only allowed for one subletting in the property and, therefore, any deal would probably require the landlord agreeing to a variation. In addition, the existing sublease did not reflect what existed. Whilst the sub-tenant occupied the part ground and second, the lease had been wrongly drafted to show part ground and part first floor.

Initial discussions with the landlord indicated that for a substantial premium they would vary the headlease to allow subleases but that they would only do so for the right type of tenant. A marketing programme was put in place and two potential sub-tenant found. One had to be discounted because the landlord did not like their proposed operation, albeit the covenant strength was good. The other potential tenant had an AAA covenant and their operation was acceptable to the landlord. However, they required not only the vacant space but also the second floor, plus because of their fit costs they required a 10 year term.

The solution was to affect a surrender of the second floor space from the coffee shop operator for a nominal adjustment in rent. This dealt with the lease error at the same time. As the incoming tenant required a 10 year term, a reversionary lease of five years was required which increased the value of the freehold and the landlord accepted that, in lieu of a premium to vary the lease.

The solution provided the freeholder with enhanced value and for the client it substantially mitigated costs and risks.