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If you are renting your premises and looking to leave earlier than anticipated (whether as a result of market conditions or business needs), assuming your lease does not include provisions allowing you to break your lease early (or that any such break date has passed), there are a number of options to consider if you are looking to move on from a property before your lease term has come to an end. Our Commercial Property experts outline these options for you below.
The most obvious approach is to seek a surrender of your lease. This will require the cooperation of the landlord, but if the location isn’t working for your business, for whatever reason, a landlord may prefer to agree to a settlement of sorts rather than face months of uncertainty.
A surrender will require a deed of surrender to be entered into between the parties. As part of any agreement with the landlord, there are several principal points to consider:
An agreement to surrender may be required if the date of surrender is to take place at some point in the future. For example, you, as a tenant, require a time period to organise your move but need the certainty of a legally binding agreement that the surrender will take place on a specified future date. It may also be useful to provide for certain works to be carried out before the surrender is completed.
An agreement must be reached in terms of any claim for dilapidations. In essence, these will reflect the extent to which the tenant has or has not complied with its obligations in the lease concerning repair, reinstatement, and the obligations relating to the property’s condition to be handed back to the landlord.
The landlord will be looking at what works are required to bring the premises back to the standard required by the lease and will want to agree on a financial settlement with you to meet the costs of such works. The level of any settlement may be reduced if you can carry out some or all of the required work before the surrender.
A surveyor will be required to conduct a dilapidations survey to establish the extent of the requisite works. Once an agreement is made, the surrender should provide that it is in full and final settlement of any outstanding breaches and that, therefore, the landlord will not be able to make any claim after the surrender in relation to dilapidations.
The parties will need to agree on whether a premium will be paid in return for the other party agreeing to the surrender. The landlord may want the tenant to pay a premium as a condition of agreeing to the surrender, or the parties may negotiate for the landlord to pay the tenant a ‘reverse premium’ as an inducement for surrendering the lease early.
It is important to note that the landlord may have to pay Stamp Duty Land Tax on any consideration they pay the tenant for a lease surrender.
Always check whether the landlord’s title to the property is charged. If so, there will usually be a requirement to obtain the lender’s consent for the surrender. This needs to be in place before the surrender takes place. If a surrender is completed without this consent, then it will be ineffective, and the lease will still be in place.
Another option to consider is to assign your commercial lease. In effect, you will be passing on the obligations and liabilities in your lease to a “buyer”.
Your landlord may be unwilling to agree to a surrender, but in most cases, your lease will allow you to assign your interest, albeit with the landlord’s consent.
Again, in most cases, this consent cannot be unreasonably withheld. Therefore, usually (though dependent on the specific lease provisions and statute), provided the “buyer” is sufficient financial standing (and can therefore show that it will be able to, for example, afford the rent), then the landlord’s consent should be forthcoming. However, you should also ensure that you are not in material breach of the lease obligations (in particular, that all rent is paid up to date).
The consent will be in the form of a Licence to Assign, and you will likely be required to pay the landlord’s costs in relation to its consent.
Section 1 of the Landlord and Tenant Act 1988 (LTA 1988) imposes duties on the landlord, which are set out below. However, tenants must be aware that the following duties only arise when a written application is served.
If a written application is not served upon the landlord or the appropriate person, then the duties do not apply.
A reasonable time is deemed to be several weeks rather than months, and the time will generally start when the landlord has been provided with all the relevant information to make their decision.
The landlord may impose certain conditions to its consent. The most significant of these for the outgoing tenant will be a requirement to provide an Authorised Guarantee Agreement (AGA).
This, in effect, will provide that you, as the outgoing tenant, will guarantee the performance of the lease obligations by your “buyer” (the assignee).
Rather than an assignment, you may prefer to sublet your premises, whether for the remainder of the term granted by your lease or, perhaps, for a shorter period. The terms of your lease will dictate the circumstances and conditions required for a permitted subletting and should be considered carefully. Your lease may, for example, prohibit a subletting of only part of your premises.
Subletting is a good option if you want more flexibility in the short term; for example, you could grant a sublease shorter than the main lease and see whether you want to renew the sublease when it comes to an end or use the space yourself again.
Similarly, with assignments, subletting will most likely require consent, and the landlord will want to be satisfied with the standing of the proposed subtenant. You will also need to be satisfied with the subtenant as you will be their landlord, and you will continue to have direct obligations and liabilities with your landlord.
It is advisable (and the terms of the lease and landlord may require) that the sublease mirrors the terms of your lease so that your subtenant has the same obligations to you as you have to your landlord.
As with assignments, your landlord will expect you to pay their costs in relation to any request for their consent. You should also consider whether any additional consents are required (e.g. that of the landlord’s lender or of any superior landlord).
If market conditions are making your current occupation (and the terms governing that occupation) unworkable, the landlord may be agreeable to varying the lease, whether permanently or on a temporary basis.
Clearly, this will require some negotiation and will be dependent on the landlord’s cooperation, but a landlord may prefer to, for example, agree to a reduction in the rent and a change to the rent payment dates rather than risk losing a tenant and having to remarket.
If you want to discuss exiting a commercial lease with a professional commercial property solicitor, then contact Myerson Solicitors on:
