When trading down is affected by your good covenant

Abstract

When a ‘blue chip’ tenant disposes of their leasehold interest, the landlord will invariably have the upper hand if another operator of similar covenant strength is not available to replace them; consequently, the outgoing tenant can find themselves being held to ransom and their leasehold trading asset becoming a financial liability. The impact on the freeholder's investment value of the blue-chip tenant vacating can be in the region of 1–4 times annual rent and not surprisingly landlords will wish to avoid their tenant leaving. This paper looks at the problems that can arise from the writer's practical experience of disposing of leases held by tenants of good covenant strength to tenants of weaker financial standing. Focus is given to the restaurant sector, a rapidly growing and dynamic market where leasehold property, due to reasons of supply and lower cost of entry (than freehold), is the preferred choice of tenure and where the failure rate of new restaurants is extremely high. The latter combined with the impact on the landlord's investment value are good reasons for the landlord to be difficult with the tenant's proposal to assign.