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Zoning out the zombie tenant

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The current recession has brought businesses a lot of difficulty, prompted a lot of debate and spawned new buzz phrases such as: The ‘toxic lease’ where a tenant realises their obligations are going to be enforced against them. The ‘zombie business’ which survives on low interest rates and its creditors going easy on it on the basis that receiving some money is better than none at all.

The zombie business is accused of undermining healthier businesses who repay their debts and promote growth in the economy by buying in work and taking it away from their healthier rivals. The zombie business is unable to cope with unexpected crises and inevitably is doomed to fail. The longer the zombie business survives the greater the chance of it infecting other businesses.

What has this got to do with commercial leases? A lease to a zombie tenant can be just as toxic to its landlord as to the tenant.

Almost every business landlord in the last 5 years has heard from their tenant of the difficulties the tenant is facing and been asked to make some sort of concession ranging from the minor – monthly as opposed to quarterly rent payments, delayed or ignored rent reviews – to the more substantial – reductions in rent, the permitted build up of substantial rent arrears and letting tenants off dilapidations.

Should landlords be doing this?

Many tenants are healthy businesses with a realistic prospect of growth in the future but there are also those for whom growth and the possibility of paying a full market rent is never going to happen even after the recession has passed. In order to survive a business has to be able to adapt and grow as opposed to stand still and be overtaken. Common threats faced by all businesses include the internet, wholesale providers of goods and services and changes in supply and demand trends in their particular market. A landlord will want to avoid having a long term business relationship with such a tenant as they may exert a damaging influence on the landlords other tenants by establishing negative trends.

Landlords have shied away from disposing of the zombie tenants in the past on the basis that a tenant, any tenant is better than no tenant at all. That may no longer be the case.

It’s true that where business rates apply a landlord will want the property occupied so the tenant pays the rates rather than the landlord. It’s worth remembering also that there are rating reliefs available for business premises and increased rent available from tenants who are not zombie businesses.

Landlords may consider that it’s worth taking the chance now and terminating the zombie business’ tenancy in order to free up the property for future positive rental yield.