Crowning moment

Contract 2 iStock 000003466551XSmall 146x219Phil Lawrence examines some of the issues raised by the use of crown exemption clauses in public sector leases.

A particular issue with public sector leases is a Crown Exemption Clause ("CEC").  This is essentially a contractual agreement in the lease relating to the status of the tenant as a Crown Body.

In recent years there has been a significant moratorium on the Crown taking new leases as efforts are made to improve efficiency of the public sector estate. However the Crown remains the single largest tenant of real estate in England and Wales. Part of the drive to extract the best possible value has focussed on the strength of the Crown's covenant and this type of clause is arguably part of this. 

A couple of points to consider with these clauses are:

  • Crown body: A CEC will generally provide that a Crown Body means a central government department, executive agency or government training funds.  With increased site sharing, it is worth checking that the intended tenant falls within the definition of a Crown Body.
  • Payment terms: It would be common for a CEC to provide that, while the tenant under the lease is a Crown Body, the tenant is not obliged to pay the rent in any particular way. The landlord often reserves discretion about how rent is collected, for instance, by direct debit. However, this may need to be overridden by the CEC, for instance if the rent is to be paid by Government Payment Order or other mechanism. This can be relevant in dealing with a commercial landlord, particularly where government payments are increasingly dealt with by separate shared service centres. 
  • Sharing possession: A CEC can make clear that the tenant may share occupation of the premises with another Crown Body (or other public sector bodies). As the Government increasingly looks to seek efficiencies in sharing space, this may become increasingly useful. A commercial lease will commonly prohibit sharing the space or require a consent first from the landlord. Obtaining this consent, or establishing if it is required, can often take time and involve a cost. A CEC exempting sharing between public bodies could save administrative time for the tenant.
  • Guarantees: A CEC may also be negotiated to include provision that the Crown Body as tenant is not obliged to provide a guarantee (in the sense of an Authorised Guarantee Agreement often required in commercial leases) if there is assignment to another Crown Body. Indeed, in some cases the exemption could be extended to assignment of a lease to a private sector tenant (for instance for surplus space). This could be particularly beneficial as otherwise the Crown maybe providing a guarantee to a commercial tenant as part of a lease assignment.
  • Self insurance: It is often the case that a commercial lease will require an insurance rent to be paid or contributed by the tenant. This is a reservation by the landlord requiring the costs of putting in place buildings insurance to be met by the tenant. However, a Crown Body or other public body may often prefer to self insure. It will make the position clearer if specific wording in a CEC, essentially overriding the insurance rent provision, is included in a lease to a public sector tenant.

Phil Lawrence is an Associate at Veale Wasbrough Vizards. He can be contacted on 0117 314 5441 or byThis email address is being protected from spambots. You need JavaScript enabled to view it.