There are a number of reasons why a tenant may want to bring a commercial lease to an end. However, it is rarely as simple as just walking away and returning the keys to the landlord. A lease is a legally binding contract, and your landlord can take you to court if you break it. However, depending on the circumstances, your landlord may be prepared to negotiate a compromise. In this article, how to get out of a commercial lease, we take a look at the process and mechanism involved.
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How easy is it to get out of a commercial lease?
In recent years, leases have tended to become shorter with more flexible terms. There has been a general shift in focus of a lease in favour of the tenant. However, it should be remembered that a standard or institutional lease is still challenging for a tenant to get out of. These leases usually run for between 12 to 25 years and have strict legal restrictions. One of the reasons for this is because the property can be traded, with its investment value being affected by the terms of the lease. The ability of a tenant to get out of a lease depends on the terms of the lease, the state of the property market at the time and other negotiating factors.
What are the options available to get out of a commercial lease?
Break clauses
A break clause in a contract gives a tenant the right to terminate the lease at specified dates. For example, a five-year lease might have a break clause that allows the tenant to terminate the lease after three years. If a tenant needs to get out of the lease before any specified break clause, this can prove problematic. The tenant will usually have to notify the landlord in writing during a fixed notice period so it is vital the deadline is not missed. Bear in mind that the landlord may be legally entitled to refuse to accept the break if there is a breach of any of the terms of the lease, however minor, for example, if the rent is in arrears. It is important to carefully check the lease for any penalties.
Surrender the Lease
One option for getting out of a commercial lease early is to approach the landlord and request to surrender the lease. In this instance, both the tenant and landlord will reach an agreement to end the lease. It should be remembered that the landlord is not under a legal obligation to agree to allow the lease to be surrendered and any agreed terms are open to negotiation. Often, the tenant will have to pay a surrender fee to the landlord in order to compensate for breaking the lease agreement but all legal obligations of the tenant will come to an end.
If the landlord agrees to surrender the lease, this should be recorded in a deed of surrender. If the lease has been registered on the title of land, it is important to also register the surrender of lease form.
Assigning the lease
The lease may give a tenant the right to assign the lease or sub-let to another tenant. If the lease allows this, this may be with or without restrictions. It may also be possible to retrospectively negotiate these rights with the landlord for a fee. In general terms, the shorter the lease, the easier it should be to get out of. It may be possible to negotiate a deal with the landlord by paying him or her some or all of the outstanding rent.
Assigning a lease (passing it on to another business) is a half-way step between terminating the lease and sub-letting. Short leases often prohibit the assignment of the lease. It may also be prohibited in the last few years of a lease. Even if assignment is permitted, the lease will restrict who the new tenant can be and you are likely to need the landlord’s consent, although this cannot be unreasonably withheld. One of the fundamental considerations relates to the strength of the covenant of the incoming tenant. The landlord will usually want to check the prospective tenant’s accounts and references. The landlord will also want to know how the new tenant will use the premises, and to be told of any planned alterations. The permitted use of the premises may be restricted in a way that disqualifies the proposed new tenant.
Although the new tenant (assignee) is liable to the landlord to fulfil the terms of the lease, the original tenant may be left with some liabilities and this will usually include guaranteeing payments from the new tenant. For leases beginning before 1 January 1996, the original tenant remains liable to the landlord for all payments owed by any subsequent tenants, throughout the full period of the lease. This is in accordance with ‘Privity of Contract’ law. For leases beginning after 1 January 1996, the landlord will usually be entitled to require the tenant to guarantee payments by the next tenant (but not all subsequent tenants), failing which the landlord may be entitled to refuse to let the original tenant assign the lease.
Subletting
The tenant can elect to either sublet the whole premises or only a portion of the premises. This could be a good option if the tenant wishes to remain on the premises but reduce their costs, as the subtenant will pay a portion of the rent.
Subletting the premises will also require the landlord’s consent. As is the case with an assignment, the lease will also include conditions that must be satisfied before the landlord consents. These conditions are generally similar to the ones surrounding an assignment.
It is important to note that if the tenant decides to sublet, this option will not release them from their obligations under the lease. While the subtenant will be legally responsible to the tenant, the tenant will still be legally responsible to the landlord for the entire lease. It is important to ensure that any sublease is formally documented and requires the subtenant to compensate the original tenant if their actions cause a breach to the original lease.
Licensing
If you decide to licence the property, this does not allow the other party to use the licensed area exclusively. So, if you plan to share parts of the premises with the other party, a licence will be the right form of contact.
A licence will also require the consent of the landlord and may include similar conditions to an assignment or sublease. As with a sublease, licensing the premises will not end the tenant’s legal responsibilities under the lease. Also, the tenant will be legally responsible for paying the landlord’s legal costs associated with consenting to a licence.
Is there anything else to consider?
The costs incurred in getting out of a commercial lease may be substantial. It is important to be realistic about the price a tenant will have to pay. Do not ignore the cost of the professional advisers involved, on both sides and be mindful that the bills for the landlord’s advisers will usually be paid by the tenant. Other things to consider are the cost of finding a new tenant, the extent of tenant liability under the lease for dilapidation charges and the cost of finding new premises and relocating.
How we can help
We have a proven track record of helping clients deal with the termination of commercial leases. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of commercial property services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/commercial-property-services/
How to Contact Our Commercial Property Solicitors
It is important for you to be well informed about the issues and possible implications of buying, selling or leasing commercial property. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Commercial Property solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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