No matter how long it takes, it’s inevitable that at some point either a tenant or landlord will wish to end a commercial property lease. This can come either at the end of the lease period, or indeed, earlier than this point. If you would like legal advice when it comes to ending a commercial lease, get in touch with us here.
There are a number of reasons why you may wish to end a commercial lease early. This could include outgrowing your office, or if your company is struggling financially and you are in need of a lease which better matches your requirements.
But how exactly does a commercial lease end?
There are three main ways in which a commercial lease can end. These include:
1. Exercising a break clause
2. Surrendering the lease
3. Waiting for the lease to expire
These are vastly different circumstances which affect the way in which a commercial lease ends. Let’s take a look at each of these in detail, starting with break clauses.
Break clauses are common clauses in commercial property leases which allow commercial tenants or landlords to end a lease early without facing a penalty. They can be included in a fixed-term lease and typically come at one or more fixed points in time, such as eighteen months into a three-year lease.
The two main types of break clauses are:
1. A fixed date notice – which brings the lease to an end on a particular day
2. A rolling data notice – which allows a notice to be served on or after a particular day
We would advise you to ensure that even after notice is given, you continue to comply with the provisions of the notice from the point the notice is given and until it actually ends. The break clause will say how long the notice is. We would also advise tenants to seek advice before deploying a break clause.
Compliance with the notice period is particularly important when it comes to a fixed date notice, with the consequences for not complying with this being potentially damaging.
Break clauses typically have several conditions which must be complied with. These include:
- The date
- The length of notice
- Who receives the notice
- How the notice has to be served
- Where the notice has to be served
- Payment of rent and any service charge when due
It is also worth bearing in mind the fact that once notice for a break clause has been given, it cannot be withdrawn. This is the case even if both the tenant and landlord agree to waive the break notice.
Surrendering the lease
As well as a break clause, in some cases it is also possible to end your lease with your landlord’s agreement, known as surrendering the lease. Unlike with a break clause, there is no obligation on a landlord’s behalf to accept the surrender of a commercial lease. We would always advise you to consult a legal expert when considering surrendering your lease, as it may be that you have further legal obligation to your landlord which you are not aware. However, like a break clause, there are two main ways in which a lease can be surrendered.
1. Express surrender in writing
Express surrender in writing is the most common form of surrendering a lease and involves an express written declaration by the parties stating that they wish to surrender the lease. While this is the more expensive option, it does provide more certainty about the intentions of the parties involved.
It will usually include the date of the surrender as well as matters such as: whether you will have to pay the landlord to surrender the lease, liability for the cost of repairs to the property, responsibility for any claims that arise under the lease’s terms once it has come to an end. You should also be aware of whether you will have any rights against the landlord for any breaches of the lease once the lease has ended.
2. Implied surrender by conduct
This term is also referred to as surrender by operation of law. Implied surrender by conduct would involve handing the property back to the landlord, usually through the delivery of the keys. However, the landlord must accept the early surrender. It is not enough for the tenant to merely hand the keys back and vacate the property. One of the major pitfalls with implied surrender by conduct is that you don’t necessarily know on what basis the lease has been surrendered, if at all. This may result in you facing legal action further down the line from the landlord.
In both cases the landlord may ask for payment as compensation for the loss of a rental income. Once the lease has been surrendered, the tenant no longer has any liabilities to pay future rent or comply with the terms of the lease. Nevertheless, the outgoing tenant remains liable up until the date of surrender.
In most cases, we would advise commercial tenants to ensure that if they are going to surrender their lease, that they have express surrender in writing. This will help to prevent any complications further down the line such as whether the landlord may sue you for rent arrears, service charge arrears, damage to the property, as well as any compensation for leaving the property without the landlord’s agreement.
Waiting for a lease to expire
You might think that once your lease comes to the end of a term, it will be terminated automatically. But this is not always the case. The Landlord and Tenant Act 1954 provides a couple of key provisions for ending the lease once it has expired. However, they are mutually exclusive and can’t both be served. From a tenant’s point of view, it is possible to:
1. Serve a Section 26 notice
The primary purpose of Section 26, the Landlord and Tenant Act 1954 is for tenants to service notices on landlord to request for new tenancies. Once the notices are served, their direct effect is to terminate the tenancies immediately before the specified dates in the notices. It is clearly not the best option to choose if you wish to leave the property you are occupying. However, it is a good option to choose if you wish to end your current lease and negotiate better terms including a lower rent for your new lease.
2. Serve a Section 27 notice
Serving a Section 27 notice is by far the better of the two options if you wish to leave your current property. This is particularly useful if your landlord does not show any sign of ending the lease on its expiry. Section 27 allows you to serve either at least three months of the term to serve a notice which ends the lease on the contract’s expiry date or at least three months’ notice after the contractual expiry date.
Subletting your property
Another option, if whatever reason you are unable to terminate your lease, you may also have the option to sublet your tease. However, this is usually only possible if there is a clause in your contract which allows you to sublet. This may be the most financially beneficial in your circumstances, as it can allow you to use rent payments from your tenant that you have sub-let to in order to meet the financial obligations of your lease. You may however not be able to charge more than you pay in rent yourself.
It is also worth bearing in mind that you will take on greater responsibility in managing the premises, as you become the landlord of the incoming tenant. As the landlord, you will likely also be the main contact for any queries relating to the property.
Landlords will usually wish to approve the terms of a sublet before consenting to this new arrangement.
Our thoughts on ending a commercial property lease early
Before looking to end a commercial property lease early, it is always worth seeking legal advice to ensure that you meet the responsibilities required. There are often many costs associated with ending a commercial property lease early, and a small error can result in you facing significant penalties for failing to meet certain conditions. In some cases, especially where there is no break clause, it may be more worthwhile simply waiting for a commercial lease to expire. This is especially true where you are on a shorter lease.
Nevertheless, our conveyancing experts in commercial property team will be able to offer you our specialist advice at highly competitive rates. We have experience in helping both commercial tenants and landlords to terminate commercial leases before their expiration date. Get in touch with us by clicking here.
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