Early Termination of Commercial Leases; from a Tenant’s point of view

22 Feb 2019

This article discusses brief summary of options available to a tenant to terminate a commercial lease before its end date.

A commercial lease is a legal contract and are generally granted for a fixed period of years known as a term. The tenant would usually remain bound to pay rent and comply with all other obligation in the lease until the end of lease term. If there is an existing lease in place, then what are the tenant’s options when looking to leave the property before end of lease term?

There are different methods by which a commercial tenant can terminate its commercial lease before its expiry, and they are as follows: –

Break clauses

One of the options for a tenant to terminate a commercial lease early is to have a break right in the lease. A break right is a provision in a lease which allows a tenant (and sometimes the landlord) to end the lease early. It may arise on one or more specified dates or at any time during the lease term, which is often called on a “rolling” basis.  It is the best-case scenario for a commercial tenant to have a break right in favour of the tenant as it will give them an option to terminate the lease before the end of the contractual term.

However, there are certain requirements that must be followed to ensure that the exercise of the break right is valid. For example, the tenant must serve on the landlord a break notice on the relevant date, time and in accordance with a break provision in the lease otherwise the notice may be invalid, and the tenant will remain liable for rent and all other responsibilities in the lease.

In some cases, a break clause can be conditional upon giving vacant possession, or paying all rents due, or can only be exercised by the original tenant, which might not necessarily be the tenant in occupation of the property.  If a break right is conditional, then the tenant needs to be careful as there is case law on the exercise of conditional break rights. For example, in the case of Riverside Park Limited v NHS Property Services Limited (2015) EWHC 1313 (Ch), the landlord successfully argued that the tenant had not provided vacant possession. In this case, the tenant failed to remove various alterations it had carried out including internal demountable partitioning when the tenant vacated the property.

It is therefore important for tenants looking to exercise a break right to be advised by their lawyer through the process to avoid an expensive mistake.

The tenant needs to remember that once a break notice is served, it cannot be withdrawn. If the tenant changes its plan once the notice has been served, then a new lease will have to be agreed with the landlord.

Surrender

If an existing lease does not include a break right, then a tenant can negotiate with the landlord to terminate the lease early. This is known as a surrender. The surrender of a lease by a tenant to its landlord is a consensual arrangement between the landlord and the tenant. The surrender can either be documented in writing (called Deed of Surrender), or it can be inferred from the conduct of the landlord and the tenant which is known as by “operation of law”. If the landlord is willing to take the property back, then a surrender is a way to bring the lease to an end.

The landlord cannot be forced to take back possession of the property if he does not agree to a surrender. The lease will have to remain in place, if the landlord refuses to accept surrender of lease.

Assignment or sublet

If a tenant needs to terminate its lease and give up the possession of its property where there is no break right in the lease, and the landlord will not agree to a surrender, the tenant may still be able to assign the lease to a third party, or to sublet the property. This can be a way to limit the outgoings, but the tenant should seek advice on the requirements of the lease for assignment or subletting. Great care must be taken as many commercial leases do not allow the tenant to assign or sublet lease without prior landlord’s consent.

Holding over

Holding over occurs when a tenant remains in occupation of its leased property after the expiration of the original lease term.

Only a lease which has protection under section 24 to 28 of the Landlord and Tenant Act 1954 (LTA 1954) entitles the tenant to remain in its business property and hold-over when its lease expires.

If the tenant remains in occupation under section 24 to 28 of the LTA 1954 following expiry of the contractual term of the lease, then the tenant, in such circumstances, cannot just leave, but instead a notice under section 27 of the LTA 1954 must be served, giving at least three months’ notice to bring the lease to an end. Careful consideration should be given as to who is the legal landlord and how and when the notice should be served.

Other option

The other drastic option which might be available for an incorporated company tenant through voluntary arrangement (CVA) procedure. A CVA is an insolvency and rescue procedure under the UK Insolvency Act 1986, allowing a company in financial distress to make legally binding arrangements with its unsecured creditors. Generally, this involves rescheduling or reducing the company’s debts or even amending certain contractual terms. In appropriate circumstances, a CVA may allow a tenant to vacate a loss-making property without the need for a break right or negotiated surrender. However, CVA is a specific area and beyond scope of this article.

Nothing on this site constitutes to legal advice or gives rise to a solicitor/client relationship. Specialist legal advice should be taken in relation to specific circumstances.

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