Some commercial tenants find that they no longer require a lease of the property they are renting due to expense or business needs. In many leases, there are express provisions governing a tenant’s potential right to exit a lease or transfer their interest in the lease to a new 3rd party.
There are different methods of transferring your lease, depending on your obligations to the landlord in the lease. The most common are assignments and underletting. Alternatively, to bring the lease to a complete end, there may be the option to exercise any break clause in the lease or potentially agree with the landlord to surrender the lease.
The important point to note is that a tenant is only permitted to transfer the lease if provisions are expressly set out in the lease itself. The ability to transfer or exit the lease also depends on the particular facts of each lease/situation and whether there are any existing or current breaches of the lease or specific prohibitions imposed by the landlord.
Assignment of a lease
Assignment is when you transfer the lease to a 3rd party (with the landlord’s consent). This 3rd party would then become the new tenant, and you would no longer be a party to the lease. However, it is a usual requirement of most landlords that the outgoing tenant guarantees the performance of the lease obligations by the incoming tenant, usually by a guarantee agreement.
The first step is to check the lease to see whether the assignment is permitted. It may be that the tenant is only permitted to assign the whole of the premises, not just the part – the clause(s) in the lease should clearly set this out. The lease will also set out any conditions the landlord may impose before consenting to an assignment, for example, requiring the outgoing tenant to provide a guarantee as above.
If the landlord consents, it will then be necessary to formalise the assignment in a document called a ‘licence to assign’, which a solicitor will draft and/or review, along with any guarantee agreement if appropriate. Once completed, the landlord must be informed of completion, the new tenant will be bound by all the obligations in the lease, and the previous tenant will drop out of the picture (unless it has provided a guarantee).
Underletting to another tenant
Underletting differs from assignment in that the outgoing tenant still remains involved with the lease. An underletting is where the current tenant sub-lets the property to a 3rd party (again, with the landlord’s consent). The old tenant will then become the landlord of a new sub-lease created between the old tenant (now a landlord) and the sub-tenant.
There are usually conditions and requirements set out in the original lease that govern any potential sub-letting. For example, sub-letting is usually not permitted if you are in rent arrears or have failed to comply with any of your obligations under the lease.
Further, the head landlord can impose requirements on the terms of the sub-lease, for example, as to the amount of rent, the term of the sub-lease, or may be permitted to vet the sub-tenant or require the sub-tenant to directly agree with the landlord compliance with the original lease.
An important point to note regarding the sub-lease is that it cannot be for a term longer than the original lease – the sub-lease must expire prior to the expiration of the term of the original lease.
The sub-lease will usually be drafted by a solicitor on similar terms to the original lease. Once completed, again, the original landlord must be informed. The sub-tenant must then pay the sub-lease rent to the new landlord under the sub-lease and comply with all obligations as set out in the sub-lease. The original lease remains in existence, and the old tenant retains all its obligations under this lease, too.
Break clauses in commercial leases
If you decide that you do not want to transfer your interest in the lease to a 3rd party and just wish to end the lease, you should check the lease to see if there are any break clauses or provisions as to ending the lease early.
A break clause allows for a tenant to end a lease earlier than the intended term expiry. A tenant is usually only allowed to exercise the break clause after a certain amount of time, for example, 3 or 5 years into the lease. There will be conditions set out in the lease before you can exercise the break clause, and it is not automatically guaranteed that you will be able to end the lease.
For example, there will usually be a requirement for you to give notice to the landlord of your intention to end the lease early – this could be six months or more notice. Also, it is common that the landlord will only consent to the exercise of a break clause if the tenant is not in breach of any obligations or conditions in the lease, so it is important to ensure you have complied with all lease obligations and conditions.
A solicitor will be able to review your lease to determine whether you have a right to break the lease and, if so, can then assist you with notifying the landlord of your intention and ensuring the correct procedures are followed.
Surrender the lease
Alternatively, a more certain and simpler option is to surrender the lease. If the landlord is happy and willing for the lease to come to an end altogether with no transfer to a 3rd party, then you can agree to surrender the lease. A lease surrender is usually formalised by a deed between the landlord and the tenant.
This deed will set out the terms of the surrender and can include any conditions or obligations as to the surrender, including:
- Any payment made for the surrender of the lease;
- Any payment made for dilapidations and/or obligations to deal with these;
- Any agreement made as to the removal of fixtures and fittings or
- Any damages payment as compensation for any existing breaches of the lease.
Once the surrender deed has been agreed and completed, the lease will come to an end on the surrender date as set out in the deed.