How to get out of a Commercial Lease early?
For many Tenants there may come a time when they need to consider how they can get out of their existing Commercial Lease. There could be any number of reasons why this might be necessary including expansion, financial hardship, relocation or a breakdown in Landlord/ Tenant relations. Whatever your reason for wanting to end your Lease, it is the Lease itself which will determine the options available to you.
The most common ways to bring a Commercial Lease to an end can be put into two categories as follows:
Termination – a clean break
- Break Clauses
You may have been alert to the possibility of a change in circumstances when you first agreed the terms of your Lease and (sensibly) negotiated a Break Clause. A Break Clause will allow you to terminate the Lease on a fixed date (or sometimes on a rolling basis) upon serving a certain amount of notice on your Landlord (commonly 3-6 months).
When exercising a break, it is important to strictly adhere to the terms and conditions of your break clause as otherwise your Landlord may refuse your right to break. Common conditions include that all rent and other sums due under the Lease have been paid up to date, that you have complied with your repairing obligations and that you hand the property back to the Landlord free from your occupation and any subsisting tenancies.
It is prudent to make sure you have complied with any terms and conditions attached to your break option and to ensure that you serve your break notice in good time (which should include a few days for service of the notice). You should always check the notice provisions in your Lease to check that the Break Notice is served properly.
- Negotiate a surrender with your landlord
If your Lease does not include a Break Clause or you have missed your opportunity to break your Lease (i.e., your break date has passed) you may consider approaching your Landlord to agree a surrender.
This option also gives you a clean break as all of your liabilities will come to an end (provided you negotiate a proper Deed of Surrender for which it is advisable to instruct a solicitor) upon completion of the Surrender of the Lease.
It is important to note that very rarely (unless your Lease contains a separate termination clause – which is unusual) will you have a right to insist that your Landlord agree to a Surrender. You will therefore need the agreement of your Landlord to Surrender the Lease and your Landlord may want you to pay a premium in return for their agreement to end the Lease.
Replacement – ongoing liability
- Assignment i.e., transferring your Lease to a third party
If you are unable to obtain a clean break or you believe there is some value in your Lease which you want to capitalise on, you may consider transferring the Lease to a third party.
The majority of Commercial Leases will permit assignments but will often only permit the same with the consent of the Landlord which usually cannot be unreasonably withheld or delayed.
There will likely be a number of conditions attached to the Landlord granting consent to an assignment and the most common condition is that the outgoing Tenant provides an ‘Authorised Guarantee Agreement’ (an ‘AGA’) which ensures that whilst the Lease is transferred to a third party the outgoing tenant will remain ‘on the hook’ should the incoming tenant fail to comply with the tenant covenants in the Lease during the term.
You do therefore need to be aware that you could be called upon during the remainder of the term to comply with the tenant covenants and in some circumstances take a new Lease for the remainder of the term or pay a lump sum (often equivalent to six months rent) to the Landlord.
If you are considering an assignment, it is therefore very important that you properly investigate the proposed assignee by checking their financial position as the assignee will only be as good as the security, they are able to provide.
An alternative to an assignment is to underlet the property i.e., to grant a Lease (known as an ‘Underlease’) out of your Lease.
If permitted by your Lease this will often require you to obtain Landlord consent before underletting the property and again your Landlord’s consent will often not be able to be unreasonably withheld or delayed provided you comply with certain conditions. The conditions attached to an underletting are often not dissimilar to that of an assignment.
It is important to note with an underletting that your Lease remains in place, and you are therefore still liable to your Landlord for the tenant covenants in your Lease. By granting an Underlease you are allowing another party to occupy the property in return for paying the rent and complying with your obligations on your behalf, but you remain liable to the Landlord
If you are considering your options in relation to ending your Commercial Lease you should ask a solicitor to review your Lease and confirm the options available to you.
Mayo Wynne Baxter have a team of Commercial Property specialists who would be happy to help.
Please call 01273 477071 for more information.