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Difference between a lease and a licence
Before ending a commercial lease, anyone occupying commercial property must first understand the legal basis of their right to be there. In almost every case, this is because of a written document called a lease or a licence.
However, leases and licences are very different, and problems can arise if either party is unsure of their specific rights and obligations, including those that apply to ending the arrangement. Unfortunately, the distinction between leases and licences is sometimes blurred as the court has held that some agreements stated to be licences are, in fact, leases.
See: Lease or licence – what’s the difference and why does it matter?
Contents
- Ending a commercial licence
- Ending a commercial lease: generally
- Ending a commercial lease: tenants
- Ending a commercial lease: landlords
- Landlord and Tenant Act 1954
- Squatters in commercial premises
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Ending a commercial licence
Typically, a licence to occupy commercial property is a short-term agreement between a landlord and tenant. Licences offer no security of tenure and are terminable by either party after a notice period.
Ending a commercial lease
The drafting of most leases provides the landlord and tenant with some degree of future security. However, there are times when either party wishes to exit a lease before the expiry of the term. For example, the tenant may want to relocate or close their business. But getting out of a lease is more complicated than simply walking away from the premises and returning the keys. That’s because the parties will almost certainly have agreed to specific lease terms governing the ending of the arrangement.
There are several ways to end a commercial lease early. The processes differ depending on which party wishes to terminate the lease and under what circumstances.
“Oliver’s breadth and depth of knowledge is exceptional, and I could not have wished for better service. I always felt assured that my matter was in the most capable of hands.”
Options available to tenants
A tenant wishing to end a commercial lease early has four main options:
Commercial lease break clause
Some leases include a ‘break clause’ allowing both parties to end the lease after a certain period. However, should you wish to exercise a commercial lease break clause, you must adhere closely to the notice requirements. For example, the clause may require you to provide several months’ written notice or to use a specific address to notify the landlord. Failing to meet notice requirements may invalidate the opportunity to exit the lease.
Assignment of commercial lease
Your lease may permit you to assign (transfer) the remainder of the term to a new tenant. However, the landlord’s consent will almost certainly be required, and the new tenant must satisfy their requirements.
Standard checks for a landlord regarding a potential new tenant include:
- references;
- their financial status;
- the proposed use of the premises; and
- the likelihood of them requesting alterations to the property.
Also, commercial tenants assigning a lease are routinely required to provide personal guarantees for payments by future tenants, or at the very least, those of the next tenant. Therefore, the assigning tenant’s liabilities under the lease usually continue, with a need to step in if the assignee breaches lease terms, for example, by failing to pay the rent.
If the new tenant is a limited company, the directors will likely be required to provide the landlord with personal guarantees.
Subletting commercial premises
If you cannot assign the lease, check whether the lease allows you to sub-let the premises to a new tenant. If so, you can vacate the premises and install a new tenant who will reimburse you for rent and other obligations. However, you remain liable to the landlord for all lease obligations.
Although the sub-tenant’s lease may be substantially shorter than your ‘head lease’, the terms will likely be similar. Remember that subletting means taking greater responsibility for managing the premises, including being the first point of contact for any concerns or queries.
Surrendering a commercial lease
If the lease contains no break clause or other option, it might be possible to negotiate an early end to the arrangement, referred to as surrendering a commercial lease. For the tenant, this should provide a clean break from their liabilities. However, obtaining legal advice is imperative to ensure you have no further legal obligations to the landlord.
It’s important to remember that in return for surrendering a commercial lease, the tenant is generally expected to compensate the landlord. With this in mind, the tenant must compare this cost with that of remaining in the premises.
Options available to landlords
A landlord can also end a lease early through negotiation, paying the tenant to leave, or exercising a break clause. However, they may also have an additional option, forfeiting a lease.
Forfeiting a lease
If a tenant breaches a lease term, the landlord may be able to end the lease early if it contains a clause allowing forfeiture for the breach.
The forfeiture procedure depends on the nature of the breach. For example, if the tenant fails to pay rent, the landlord generally does not need to serve notice on the tenant. However, with other breaches, the landlord must serve a notice under Section 146 of the Law of Property Act 1925.
To effect forfeiture, the landlord may physically re-enter the property. However, they can only do this if the tenant is not in the property. The landlord must commence possession proceedings against the tenant if they cannot peaceably re-enter the property.
Landlord and Tenant Act 1954
Leases protected by the Landlord and Tenant Act 1954 (‘the Act’) do not simply end on the contractual expiry date. For example, a tenancy for a fixed term of ten years does not expire on the tenth anniversary unless terminated in accordance with the procedures set out in the Act. Instead, the lease continues on the same terms under Section 24(1).
A key part of the processes under the Act is a requirement for a party to serve a notice on the other to make clear their intentions. Whether you are a landlord or a tenant, always seek legal advice before serving notice. There are traps for the unwary and potentially serious consequences for getting it wrong.
Section 25 Landlord and Tenant Act 1954
For landlords, a notice served in accordance with Section 25 of the Act can either:
- initiate the renewal of the lease, stating the terms on which the landlord is willing to renew; or
- oppose renewal on one of the statutory grounds set out in Section 30(1) of the Act.
Section 26 Landlord and Tenant Act 1954
Tenants can a notice under Section 26 of the Act stating they wish to renew the lease and setting out the terms on which they wish to renew.
Section 27 Landlord and Tenant Act 1954
Tenants can also serve a notice under Section 27 of the Act stating they do not require renewal.
Squatters in commercial premises
The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) made squatting in residential buildings a criminal offence where before it was purely a civil matter. However, LASPO does not extend to commercial premises. Accordingly, there is some evidence that the risk of a fine or imprisonment has driven some squatters to favour vacant commercial premises.
As a result of the Criminal Law Act 1977, commercial landlords risk committing a criminal offence if they seek to remove squatters from their properties forcibly.
It’s important for landlords to act promptly once aware that squatters are in occupation. Squatter groups are often well organised, actively using social media to advertise that a property is vacant, encouraging others to join them on a ‘strength in numbers’ basis.
The only viable option for a landlord is to apply to the court for a possession order in one of two ways:
- An application for a Summary Possession Order (SPO) is usually made to the County Court. In most cases, the Court lists a hearing before a judge within five to seven days of issuing the claim.
- An application for an Interim Possession Order (IPO) is usually made to the County Court. The purpose of an IPO is to obtain a possession order quickly as an interim measure. If granted, the court will list the matter for a full hearing at a later date.
Whether an SPO or an IPO is more appropriate depends on the circumstances. Important considerations include:
- the urgency for possession;
- how long the squatters have been in occupation; and
- whether possession is the only remedy sought.
