There are a number of reasons why a commercial tenant may want to end their lease earlier than expected and these are the main options that might be available to do so:
1. Let the term expire
Check the contractual term of your lease. If it is due to expire shortly, the simplest option may be to let the term simply run out. This is because, if the lease is not “protected” by the Landlord and Tenant Act 1954 (the Act), the lease will simply end on that date irrespective of whether or not you have vacated. However, if your lease is “protected” by the Act, and assuming no notices have been served under the Act beforehand, you will need to vacate and cease trading from the property by the contractual expiry date to ensure it has ended.
Our real estate team can advise you on the extent of your “protection” under the Act, what options you have, and help you understand what other lease obligations you may need to comply with before the lease expiry.
2. Exercise a break clause
Check if your lease contains a tenant break clause, often referred to as an “option to determine”. This allows the tenant to serve notice on the landlord to end the lease before the expiry of the contractual term.
It is important to ensure that the break notice is served correctly in accordance with the lease and that any conditions to the break are complied with. Our real estate disputes team can advise on the terms and conditions of your break clause and ensure that the break notice is served correctly. Please also refer to our Q&A on exercising a break clause for further information.
3. Assign your interest in the lease
Check if your lease allows you to transfer/sell your interest in the remainder of the lease term to a third party, referred to as an “assignment”. The landlord’s consent is generally required for an assignment and the landlord may require that you provide an authorised guarantee agreement (AGA) as a condition of the assignment. An AGA is a guarantee from you of the new tenant’s performance of the tenant covenants in the lease. This means that, even after transferring the lease, you would still be “on the hook” if the new tenant fails to comply with the lease terms.
If you do want to assign the lease, you would be responsible for finding the new tenant and the lease will likely require you to apply to the landlord for consent to the assignment and pay the landlord’s legal costs in connection with this. Our real estate team can assist with making the application to assign, documenting the landlord’s consent to the assignment and the assignment itself. Please also refer to our Q&A on assigning a lease for further information.
4. Agree a surrender with the landlord
You can approach your landlord to request a surrender of the lease, which is an agreement between the landlord and tenant that the lease will be brought to an end early. The landlord is not obliged to agree a surrender of the lease and the terms of the surrender are a commercial negotiation between the parties. However, the landlord may require a premium to agree the surrender, particularly if there are a number of years remaining on the lease or if they expect the property will be difficult to re-let. A surrender agreement may also seek to achieve a full and final settlement between the parties, including dilapidations, to help give you a clean break.
Our real estate team can assist with negotiating and documenting the surrender and our real estate disputes team can assist with any issues arising out of the negotiations, in particular relating to dilapidations.
5. Underlet all or part of the property
You might also consider underletting all or part of the property. As with assignment above, check if your lease allows you to underlet all or part of the property to a third party. The landlord’s consent is generally required for an underletting. However, you would not be disposing of your interest in the lease and would still be responsible for paying the rent, albeit you would be collecting rent from the undertenant, and complying with the other conditions in the lease or ensuring that the undertenant does.
6. Serve three months’ notice under the Act
If the lease is “protected” by the Act, has more than three months remaining, and you are certain that you want to leave on the contractual expiry date, you can serve notice under section 27(1) of the Act giving the landlord at least three months’ notice of your intention to end your lease on the contractual expiry date.
Alternatively, if your lease is “protected” by the Act, you are currently “holding over” under the Act after the contractual expiry date has passed, and you have not otherwise served notice under section 26 for a new lease, you can serve notice under section 27(2) of the Act, giving the landlord at least three months’ notice of your intention to bring the lease to an end on any date.
Our real estate disputes team can assist you with understanding your current position and ensuring that the notice is served correctly.
If you are looking to terminate or dispose of your interest in your lease, please do contact our real estate team or real estate disputes team for assistance.
If your lease term is coming to an end, please also refer to our Q&A on practical considerations when your lease term expires.