How can a business lease be brought to an end?
20 March 2019 by Ellen Petersen
We are often asked by commercial tenants (and landlords), how a business lease may be brought to an end in the absence of a formal option to break within the lease.
Clearly, unless the tenant is in default (for example for material breach of a tenant covenant under the lease or failure to pay the lease rents, where the landlord can forfeit the lease) an option to break (which is a contractual right to end the lease) is the best possible scenario. Failing that, the parties would need to agree terms to bring a lease to an early end. There are a few ways that can be done and these rely on creative negotiations between the parties:
Where a break date has expired under a continuing lease: The tenant may be able to agree with its landlord, a negotiated exit even after the break date has expired. If the landlord could easily re-let, needs to make substantial alterations or could use the premises for its own purposes, negotiating a further break right could provide flexibility for both parties. It could even provide the landlord with some time to market the premises and tie up a new tenant at the same time as accepting the premises back from the outgoing tenant, thereby avoiding the problem of being left with empty premises.
Surrender of a continuing lease: The important thing is that both landlord and tenant must agree the terms of a surrender and ideally, negotiate a formal deed to evidence the surrender and any conditions attached to the surrender. For example, a tenant may agree to make a payment to the landlord by way of inducement. The payment would “compensate” the landlord for any lost revenue/income from the lease. The tenant will want a complete release from its obligations under the lease, including any obligation to repair and decorate and to reinstate any alterations made during the term of the lease. Any payments agreed between the parties could be made on the day of surrender and/or set out future payments to be made. From the tenant’s perspective, any surrender should also include a release of past, present and future claims under that lease. Conversely, a landlord would want a release from the tenant for its own obligations under the lease (ie the landlord’s covenant to insure, or to provide services).
Where a tenant remains in occupation of premises where the contractual term of the lease has expired: this is called “holding over”, as the lease continues under the Landlord and Tenant Act 1954 (the Act). A tenant which is holding over will need to provide the landlord with at least three months’ notice of its intention to leave, by serving specific notice under the Act. At this point, the landlord will want to consider serving the tenant with a schedule of wants of repair that may have accrued during the term of the lease (a schedule of dilapidations). The landlord would need to check the lease carefully to ensure that it contains specific tenant obligations to decorate, repair and maintain the premises and then capture those tenant commitments by a formal schedule of dilapidations – a good surveyor will be able to assist with this.
Where a (corporate) tenant is financially unstable: where a tenant has made sporadic (or no) lease payments over time and the lease is continuing, a Company Voluntary Arrangement (CVA) might provide the tenant with a solution to vacate the premises without the need to wait for an option to break (which could be at some point in the future so as to be unhelpful in the present circumstances) or a negotiated surrender.
If you would like further information regarding the above, please speak to the commercial property team here at Fisher Jones Greenwood LLP on 01206 700113 or email [email protected]