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A landlord and tenant can agree for a lease to be surrendered before the term ends.
It may be the case that the tenant wishes to vacate the commercial property early as it is moving premises, or the landlord wants the tenant to leave early so it can redevelop the site.
In these circumstances, the surrender will normally be documented in a deed of surrender.
There are a few points that landlords and tenants should consider when agreeing to a lease surrender.
Premiums
The parties will need to agree on whether there will be a premium 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 that they pay to the tenant for a lease surrender.
Terminal Dilapidations
One of the most important points that tenants should be mindful of is what the landlord will require in relation to terminal dilapidations.
Terminal dilapidations refer to the breaches of the tenant’s covenants in the lease relating to the condition of the property when the lease ends.
The landlord will look at what is required to bring the state and condition of the property up to the standard required by the lease and whether any reinstatement works to remove any alterations carried out by the tenant are necessary.
The landlord may be willing for the tenant to pay a sum in lieu of carrying out these works on completion of the surrender.
The sum will need to be agreed upon between the landlord and tenant, and the landlord may instruct a surveyor to carry out a dilapidations survey to establish what sum they should ask for.
Alternatively, the landlord may require the tenant to carry out the dilapidations works before the lease is surrendered.
Landlords should be mindful that if a deed of surrender states that both parties are released from continuing and subsisting breaches of the lease, they won’t be able to claim for dilapidations once the deed of surrender has completed.
Agreement to Surrender
In some situations, the parties may want an agreement to surrender to be put in place before the deed of surrender is completed.
An agreement for surrender is a contract between the landlord and tenant which would specify that the deed of surrender is to be completed either on a certain date or when certain conditions have been met.
An agreement for surrender might be used if the landlord or tenant wanted certainty that the surrender would be completed on a particular day or if the landlord wanted the tenant to carry out certain works before the surrender completes.
Legal Charges
It is essential to check whether there is a charge over the landlord’s property.
Legal charges usually state that the consent of the lender is needed for any lease surrender, so this must be obtained before the deed of surrender is completed.
If this is required, the consequences of completing without the lender’s consent are severe.
The court decided in a recent case that a lease surrender had been ineffective where the lender’s consent had not been given, so the lease was effectively still in place after the tenant thought it had been surrendered.
The landlord would also be in breach of the terms of its legal charge, which may have consequences for its lender.