Downsizing in 2023 – options for office occupiers

Now that the festive season is behind us and we have seen in the new year, many of us are thinking carefully about ways to cut back and reduce costs in 2023. Business occupiers are no different.

It is no secret that businesses are operating in particularly challenging times. The Financial Times reported today on the results of their annual poll of leading UK-based economists, which concluded that the UK may be facing one of the “worst and longest” recessions in the G7 in 2023.

Alongside this, businesses are still working out how best to implement flexible working into their daily operations. EG has discussed a recent Colliers’ report which suggests that, in light of the increase in flexible working, “almost one-third of corporate real estate professionals expect to lessen their space requirements by 20-30%”.

So, if you are considering reducing your office space, what are your options? We consider a couple of these below, but these are not exhaustive and other options might be available.

Subletting

If you have a separate lettable space within your premises that you do not need, you could consider subletting that space to a third party. Whilst this would not affect the rent you pay to your landlord for your premises, it could generate rental income from your subtenant and offset your costs. You could even consider subletting an entire property if it was surplus to your requirements.

Your lease will set out any restrictions on your ability to sublet part of or the whole of your premises. Typically landlords like to place restrictions on which sections of the property can be sublet. If your premises can be sublet (whether in whole or part), then generally speaking any subletting will require the consent of your landlord, which usually must not be unreasonably withheld or delayed.  Your lease may also set out specific terms which any sublease must contain – for example, a minimum rent value for the subtenant to pay or a maximum length of the term of a sublease. Your lease may also include restrictions on the nature of the subtenant who would take on the lease.

Ending your current lease early

If your current premises are no longer suitable and you are considering a move to alternative premises, then you may be able to bring your existing lease to an early end. There are a few ways you can achieve this, but each will depend on what has been agreed with your existing landlord:

• Tenant Break Right – your lease may include a tenant break right, allowing you to bring your lease to an early end subject to fulfilment of specified conditions. Tenant break rights are often fixed to a particular date (for example, a 10-year lease might include a right for the tenant to break at the end of year five, but at no other time). Sometimes break rights are rolling, enabling the tenant to exercise the break at any time subject to giving notice and fulfilling the relevant conditions. It is critical that any conditions are strictly adhered to, otherwise the break right may be invalidated.
• Surrendering your lease – you may be able to agree with your landlord that you will surrender your lease by way of a Deed of Surrender; thereby bringing it to an early end. Your landlord may request certain terms if they are to agree to this, such as payment of a premium as compensation for them losing you as a tenant or a requirement to undertake certain dilapidations or repair works before ending the lease. It is also important to note that, ultimately, your landlord could simply refuse to accept an early surrender.

Whichever approach you take here, you must also be sure to dovetail the practical elements of exiting one property and entering into another. That is to say that you may not want to end up terminating an existing lease without having a formal tenancy in place for your new property; otherwise you may risk an interim period without a suitable property.

These options will work differently for different businesses. There is no “one size fits all approach” and so businesses will need to think carefully about what suits them (and their way of working day-to-day) best.

The above is a general overview and we recommend that independent legal advice is sought for your specific concerns.  If you require further information in relation to the points raised in this article you should contact Ben Butterworth, a solicitor at Charles Russell Speechlys LLP in the Real Estate team. Ben can be contacted on ben.butterworth@crsblaw.com.