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In a commercial setting, terminating a lease is often far from straightforward, with many traps for the unwary. Here, Terminating a lease
Commercial leases generally provide both the landlord and tenant with a degree of future security. However, sometimes, there’s a good reason why a party wishes to exit a lease before the term’s natural expiry. Reasons for terminating a lease early include:
- expansion or relocation of the tenant’s business.
- a tenant’s need to reduce costs.
- a landlord’s desire to sell the premises.
Visit our main page: Ending a Commercial Lease or Licence
The process for terminating a lease depends on which party wishes to terminate and under what circumstances.
Terminating a lease: Tenants
Commercial lease break clause
Sometimes, commercial leases include a ‘break clause’ allowing both parties to end the lease after a pre-defined period. However, close adherence to break clause requirements is imperative. For example, the terms may require the tenant to provide a minimum written notice period and/or to provide notice at a specific address. Failing to meet such requirements exactly can invalidate the notice and prevent the tenant from ending the lease early.
Assignment of commercial lease
Some commercial leases permit the tenant to assign the lease to a new tenant for the remainder of the term. However, this requires the landlord’s consent, and the new tenant must meet their requirements. For example, expect the landlord to check:
- references;
- their financial status;
- their proposed use of the premises; and
- the likelihood of them requesting alterations.
Also, a commercial tenant assigning a lease must usually provide personal guarantees for the new tenants’ payments. This means continuing liabilities under the lease if the new tenant defaults in some way.
In addition, if the new tenant is a limited company, the landlord will likely require personal guarantees from the directors.
Subletting commercial premises
If the tenant cannot assign the lease, a clause may allow them to sub-let the premises. Doing so allows a new tenant to move in, reimbursing the old tenant for the rent. However, the old tenant remains fully liable to the landlord for all lease obligations. It’s also important to remember that the original tenant will likely need to remain having a role in managing the premises. For example, they will probably be the first point of contact for any problems or concerns the sub-tenant raises.
Surrendering a commercial lease
Without a break clause or other available options, a tenant might consider the possibility of negotiating an early end to the lease. Should the landlord agree, this provides a clean break for the tenant. However, tenants should always take legal advice for confirmation they have no further legal obligations to the landlord.
It’s also important to remember that a landlord generally requires compensation in return for terminating a lease by surrender. The tenant must compare that outlay with the financial cost of remaining in the premises.
Terminating a lease: Landlords
Landlords have some of the options available to tenants for ending a lease early. They include:
- exercising a break clause;
- negotiating; and
- paying the tenant compensation to leave.
However, they also have another option for terminating a lease early. If the tenant breaches a lease term, a landlord may be able to end the lease early if a clause allows forfeiture for that breach. The procedure depends on the nature of the breach. For example, where the tenant has failed to pay rent, there’s generally no need to serve notice on the tenant. However, with other types of breach, the landlord must serve notice under Section 146 of the Law of Property Act 1925 prior to forfeiting the lease.
To effect forfeiture, the landlord may physically re-enter the premises and end the lease. However, this is only permissible if the tenant has clearly vacated the property. If the tenant remains in occupation, the landlord must bring possession proceedings against them based on a valid forfeiture.
Expiry of a commercial lease
The end of a commercial lease term does not always automatically terminate the lease. Whether the landlord or the tenant can end a lease on or after its term expires depends on whether it falls within the scope of the Landlord and Tenant Act 1954. (“LTA”). The LTA governs ‘security of tenure’, i.e. a tenant’s right to occupy the premises after the lease term expires.
If the lease is within the scope of the LTA, it automatically continues after the term expires as long as the tenant remains in occupation. In such cases, the landlord or tenant may terminate the lease by serving one of two statutory notices:
- Section 25 notice: The landlord can determine the lease if they can satisfy at least one of the grounds in Section 30 of the Landlord and Tenant Act 1954. Serving a Section 25 notice prevents the tenant from taking a new lease. Grounds include a persistent delay in paying rent or breaching repairing obligations.
- Section 26 notice: A tenant wanting to terminate the lease can serve a Section 26 notice.
If the landlord and tenant opted out of the LTA as part of the lease, there is no automatic right to security of tenure. In that case, either party can end the lease without notice. The party wishing to end the lease must simply inform the other in writing.