Commercial property leasing in England and Wales involves a myriad of complex legal aspects that both landlords and tenants need to navigate. One such area of contention is the inclusion of aborted cost undertakings within lease negotiations. In this blog, we’ll shed light on aborted cost undertakings, and explore why tenants should resist agreeing to them in the first place.
The Role of Aborted Costs Undertakings
An agreement for the incoming tenant to pay for aborted transaction costs is often included by the commercial agent in the agreed heads of terms (remember, agents are almost always acting in the best interests of the landlords). By agreeing to this, the tenant will be compelled to reimburse costs (which can encompass legal fees, surveyor expenses, administrative costs, and more) should the tenant decide to withdraw from the transaction. The rationale behind these clauses is to safeguard landlords from incurring substantial expenses in cases where tenants back out of lease negotiations at an advanced stage.
Once an agreement on aborted costs is embedded in the heads of terms, the landlord’s solicitor typically requests a binding costs undertaking from the tenant’s solicitor, cementing the commitment.
Why Tenants Should Be Cautious
1. Financial Burden:
Agreeing to aborted costs undertakings could place a significant financial burden on tenants. Negotiations may involve several rounds, each incurring substantial costs. If tenants decide not to proceed with the lease, they could be liable for these accumulated expenses.
2. The Unpredictability of Business Needs:
Business circumstances can change unexpectedly. A tenant might need to withdraw from lease negotiations due to market shifts, financial constraints, or other unforeseen reasons. Being bound by aborted costs undertakings could trap tenants in untenable situations.
3. Negotiation Leverage:
Aborted costs undertakings might tilt the negotiation power imbalance towards the landlord. Tenants could be hesitant to negotiate terms if they fear incurring significant costs should they decide not to proceed.
4. Lack of Transparency:
Some landlords might inflate costs intentionally to recoup more than they actually spent. This lack of transparency could result in tenants paying more than their fair share.
Strategies for Tenant Resistance
While the ideal stance is to avoid providing any costs undertaking, practical considerations might necessitate compromise. Here are some strategies to consider:
- Negotiate Exemptions: Tenants can negotiate with landlords to exclude certain costs from aborted costs undertakings. For instance, legal fees incurred before a certain stage of negotiations could be exempted from reimbursement obligations.
- Cap the Liability: Another approach is to propose a cap on the amount that tenants would be liable to reimburse. This ensures that the financial exposure remains manageable even if negotiations don’t culminate in a lease.
- Conditional Undertakings: Tenants can suggest that aborted costs undertakings only occur if negotiations are abandoned without substantial reasons. This ensures that tenants aren’t penalized for unforeseen and justifiable changes.
The prudent takeaway from this is to tread carefully when considering agreements involving aborted costs. Tenants should be aware of their implications and exercise extreme caution in agreeing such undertakings. In an ever-evolving commercial property landscape, informed tenants equipped with legal insights will undoubtedly be better positioned to secure equitable lease terms while safeguarding their financial stability and negotiation leverage.