Business is unpredictable and subject to many different factors. There are various reasons why you, as a tenant, might want to end your commercial lease. However, you have likely agreed to a certain lease term over the commercial property within a legally binding contract. This means it is not as simple as just walking away and returning the keys to the landlord.
In this article will explore six options that you can consider if you want to end your commercial lease early
Surrender the Lease
It’s time to surrender the lease. Whether you’re moving out of the area or simply downsizing your business, giving up your lease is a big decision. While it may be bittersweet to say goodbye to your home, there are some definite advantages to surrendering your lease. For one thing, you’ll no longer be responsible for paying rent or maintaining the property. This can free up a significant amount of money each month, which can be used to cover the cost of moving or to start fresh in a new home. Additionally, surrendering your lease means that you’ll no longer be tied to the property.
This gives you the flexibility to move whenever you want, without having to worry about finding a new tenant or dealing with the hassle of breaking your lease. If you’re ready to make a change, surrendering your lease is a smart option.
Deed of Surrender
In order to arrange a deed of surrender your landlord has agreed to surrender your lease, you should ensure that you document this in a deed of surrender. This formal document effectively ends the relationship between you and your landlord. Both you and your landlord must sign it once you have formed an agreement to end your lease. The document will set out the key agreements you have made and ensures that neither of you have any further legal responsibilities after its termination.
There are a number of Key clauses that you will often find in a deed of surrender are those detailing:
- preconditions you may need to meet to surrender the lease;
- ‘delapidations’ requirements (i.e. requirements for you to return the premises to original condition);
- information on the return of security deposit;
- cost payments requirements; and
- release of legal responsibilities.
If the lease was registered at the land registry, you should also ensure that you register the appropriate surrender of lease form. This form will remove your lease from the certificate of title to the land.
The benefit of a lease surrender is that it will bring an end to your legal obligations. If the landlord agrees to surrender your lease early, you will often have to pay their legal costs.
Early Termination Clause
An early termination clause is a provision in a lease that allows either the tenant or the landlord to cancel the lease before its original end date. These clauses are often included in leases for apartments and other rental properties. Early termination clauses typically specify how much notice must be given, as well as any penalties that may be incurred.
For example, some landlords may require tenants to pay an additional month’s rent if they choose to terminate their lease early. In some cases, early termination clauses may also allow tenants to sublet their apartments or transfer their lease to another person. Early termination clauses can be beneficial for both tenants and landlords, providing flexibility in the event of a change in circumstances.
Assignment of Lease
A lease is a contract between a landlord and tenant for the use of property. The leased property may be a house, an apartment, commercial office space, or even land. The lease typically outlines the term of the agreement, the rights and obligations of both parties, and the amount of rent to be paid. Once a lease is signed, it becomes a legally binding contract. This means that both landlord and tenant are obligated to uphold their end of the agreement. In some cases, a tenant may need to break their lease early. This can happen for several reasons, such as job loss or relocation.
When this occurs, the tenant may choose to assign their lease to another party. This means that they transfer their rights and obligations under the lease to someone else. The new tenant then steps into the shoes of the old tenant and is responsible for fulfilling the terms of the lease. Assigning a lease is not always easy, as it requires the approval of the landlord. However, it can be a useful tool for tenants who need to get out of their lease early.
If there is no break clause, and the landlord is not interested in surrendering the lease, you may be able to assign it to a third party. You would need to find a new tenant yourself – one that meets the requirements of the landlord, whose consent will most likely be needed before the lease assignment can go ahead.
It is common for a landlord to check certain details regarding any new tenant, including their:
- Financial status (via their business accounts)
- References
- Requesting personal guarantees
- Proposed use of the premises
- Likelihood of requesting alterations to the building
Subletting the Premises
If you’re considering subletting your business premises, there are a few things you need to keep in mind. First, check your lease agreement to see if subletting is allowed. If it is, you’ll need to get written permission from your landlord. Once you have that, you can start looking for a tenant.
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
Keep in mind that you’re still responsible for the property, so it’s important to screen potential tenants carefully. Make sure to collect references and run a credit check before signing any documents. Finally, remember to communicate with your landlord throughout the process to avoid any misunderstandings. With a little advance planning, subletting can be a smooth and hassle-free experience.
Licensing
The difference between a lease and licence agreement is that only a lease can grant the right of exclusive possession to land or premises. This is where the tenant has permission to exclusively use and occupy the premises. They also have the right to exclude others from the premises (including the landlord).
If you are a tenant and you wish to exercise such a right, the premises must be clearly defined, enclosed and capable of being locked.
The premises may include a:
- whole building;
- floor of a building;
- shop in a shopping centre;
- professional suite; or
- room in a medical centre.
If other parties share the premises, it is not possible to grant a right to exclusive possession. Instead, a licence agreement may be more appropriate. Examples of premises with a licence agreement may include co-working spaces, hairdressing salons where hairdressers rent a chair to run their own business, car-parking spaces or outdoor eating areas.
Contact for more assistance
If you are looking to exit your lease early due to the possibility of insolvency, please contact one of our insolvency specialists today who can talk you through the process.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.