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How can tenants end a commercial lease early?

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How can tenants end a commercial lease early?

As a commercial tenant, you may wish to leave your lease early for a number of reasons. Perhaps your business has outgrown the property and you wish to upgrade, or maybe you’re looking at downsizing.

Either way, you have a few options to terminate the lease early.

In this article Commercial Property Partner Ben Cobb looks at your options and outlines how to go about them.

Can a tenant end a commercial lease early?

There are four ways that a tenant can end a lease. These are:

  • Through a break clause
  • Via lease surrender
  • Via lease assignment
  • Via subletting

Though a tenant can end a lease early, there are certain requirements for each of the above methods which must be fulfilled. More on this below.

What is a break clause in a commercial lease?

A break clause is a term written into the lease which gives the tenant and/or the landlord the power to terminate the lease before it would usually end.

There are two different types of break clause, the first is a fixed break clause and the second is a rolling break clause. Read on to find out the difference between the two.

Not all leases will have a break clause written into them.

Related: How to negotiate a commercial lease and its terms with your landlord

How does a break clause work?

Fixed break clauses

A fixed break clause will give either party the option to terminate the lease on a specific date. By doing this you are effectively giving up your right to the lease.

In order to trigger a fixed break clause, you will have to give the required notice to the landlord before the break date. For example, a written notice 6 months before the break date. Once notice has been given, the lease will end on the break date.

If you do not give the required notice for the break date, you will have to wait until the next break date in the lease (if there is one) to terminate your lease.

Rolling break clauses

A rolling break clause works slightly differently to a fixed one. A rolling break clause provides the option to end the lease, however, instead of doing this on a specific date, you can only do this after a certain period.

For example, if you have a 10-year lease which has a 3-year rolling break option, you can terminate the lease any time after the 3 years have passed, as long as you give appropriate notice.

More on break clauses here.

What is lease surrender?

Surrendering a lease is when a tenant effectively gives up their right to a lease by negotiating lease termination with their landlord. Both the tenant and landlord must agree on the terms of the lease surrender, otherwise it cannot take place.

Usually a landlord will be unwilling to surrender a lease, as they would lose rental income, however in some circumstances it can be beneficial to them.

For example, there could be a new tenant who is willing to pay a higher rent, the landlord may want to occupy the property themselves, or they may wish to sell the entire freehold.

How does a lease surrender work?

Once the parties have agreed that the lease will be surrendered and they agree on the terms of its surrender, there are two different ways in which the surrender can take place.

Surrendering a lease by written deed

The most common way to surrender a lease is through a written deed. This would be a simple document, signed by both the landlord and the tenant, which states that the lease will be surrendered.

Once this deed is written and signed, the lease will come to an end on the date of the surrender deed.

Surrendering a lease by conduct

The second way to surrender a lease is via conduct. This happens when the landlord and the tenant both act as if the lease has been surrendered.

For example, if the tenant moves out and the landlord gives a lease to a new tenant, similarly if the landlord occupies the property himself. These actions are consistent with the lease being ended.

It is important to note that, in this method, the conduct of the landlord must be considered to be in line with the acceptance of a lease surrender.

Does a landlord have to accept lease surrender?

A landlord has no obligation to accept the surrender of a lease.

A tenant can provide the landlord with favourable terms to incentivise them into surrendering the lease, however the landlord does not have to agree to do this.

What is a lease surrender premium?

A lease surrender premium is an additional cost which one party will have to pay for surrendering the lease.

For example, if a tenant wants to convince a landlord to surrender the lease, they would offer to pay a certain amount to have the lease surrendered.

Can you transfer a commercial lease to someone else?

In short, yes. You can transfer your lease to a new tenant.

This is also referred to as assignment. This can only take place if your lease has a clause written into it that allows you to assign your lease. At Frettens, we can check this for you.

How to assign a commercial lease

Assignment of a lease is where a tenant sells their lease rights to a third party.

The tenant will typically have to find the new tenant themselves, and will most likely have to be guarantor for that new tenant.

In addition to this, the landlord will usually require the new tenant to meet certain requirements, for example financial stability.

Once the new tenant has met the landlord’s requirements, they can effectively buy the lease from the old tenant and begin to take over the property.

Can you assign a lease without landlord permission?

You will normally need to obtain the landlords consent to assign a lease, however, in most occasions, they cannot unreasonably deny consent.

At Frettens, our Commercial Property Team can assist you in reviewing your lease to see whether the landlord can deny consent.

More on lease assignment here.

Can I sublet my commercial lease?

When a tenant takes the lease of commercial property, they may have a right to create another lease below theirs. This is known as subletting or underletting.

A tenant can, in most situations sublet a commercial lease, in part or in whole, if it is written into the lease.

The tenant will usually have to get the landlord’s consent first.

How to sublet a commercial lease

A tenant can sublet a commercial lease by essentially becoming the landlord themselves to a new tenant. The landlord for the original lease will become the superior landlord.

The tenant must obtain consent from the landlord before they begin to sublet. Once this is given, the tenant can create a new lease for the subletter. Although, the original lease will often set out terms on which a tenant can grant a sublease.

More advice on subletting, how it works and the benefits, here.

What’s the best way to end a commercial lease early as a tenant?

There isn’t necessarily a ‘best way’ to end a commercial lease early, as it depends on your circumstances.

Ben Cobb, Commercial Property Partner, said: “The best way of ending a commercial lease will depend on what your lease says and if you have a landlord that is willing to negotiate.

Break clauses can be an effective means of ending a lease if your lease has the benefit of one but it  may be that you can do this at a specific time if you do not have a rolling break.

You may have to look into assigning or subletting the lease but, again, this may only be possible if permitted by your lease.”

Expert Commercial Property solicitors for Lease Termination

Ultimately, we would suggest that you get in touch with our bright and experienced Commercial Property Team to discuss your individual circumstances.

We can check your lease to see which of these lease termination options are available to you, which would work best for you, and assist you in completing the lease termination.

Similarly, we can also represent commercial landlords through lease termination.

Call us on 01202 49255, or fill out the form at the top of this page, for a free initial consultation.

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The content of this article, blog or video is not intended as specific legal advice. For tailored assistance, please contact a member of our team.