How can I exit my commercial property lease?
In the wake of Coronavirus and the unprecedented measures put in place by the government, it is still unclear how the economic challenges faced by this country will impact businesses.
Whilst it is true that the government has put in place various schemes to relieve businesses of some economic pressures, it may well be prudent for business Tenants to consider their leases and their options should, in the worst case scenario, they need to end their lease. We have therefore set out a short guide on how to end a business lease before it’s due to expire.
Option 1 – Assignment
This is where you transfer your lease to a third party. However, you will need to be able to find someone who is willing to take on the lease. It is likely that the Landlord will have to approve the new Tenant and it is possible that you will be asked to act as a guarantor for the new Tenant, by way of what’s know as a ‘authorised guarantee agreement’. This means, that whilst you will no longer be responsible for paying the liabilities under the lease, you will, nevertheless, become responsible for it again should the new tenant default on the covenants in the lease.
Option 2 – Underlease
This is where a third party occupies the property (known as ‘an undertenant’) and you become their Landlord. Under this arrangement, you will remain liable to your Landlord under the terms of the original lease. The lease with the undertenant would ordinarily be drafted, so that the costs under your lease are mirrored. In these circumstances, the liability under the lease with your Landlord is covered by the underlease. Underletting will usually require the Landlord’s consent and approval of the incoming undertenant.
Option 3 – Break clause
It is possible that the lease has been drafted with the benefit of a break clause. This is the Tenant’s ability to end the lease before the contractual term expires, provided you have complied with certain conditions in the lease.
The rules around break clauses can be tricky and the break requirements must be followed to ensure that the break is valid.
Where you are in a fragile financial position, it is important to remember that the termination of the lease may bring forward other cost’s liabilities. You will need to consider your dilapidation liability which will require a review of the existing condition of the property and the repair covenant in the lease.
We would also expect to see an obligation on the tenant to remove any alterations which have been carried out during the term of the lease. These alterations may need to be removed before the end of the lease.
Option 4 – Surrender
Lastly, you could try and negotiate a deed of surrender with the Landlord. This deed will end the lease by agreement. In the current climate, this is unlikely to be an attractive option for any Landlord. A Landlord is unlikely to be able to find an alternative Tenant who is willing to take on a new lease, particularly, where prospective tenants are unable to physically view the property. Landlords may take the view that its better to keep a Tenant on the hook for the rent arrears (even if payment is never received) rather than have an empty premises.
Issues with sharing without consent
Leases will usually permit a Tenant to share occupation of the property with another member of a group company. The definition of ‘group company’ should be considered carefully before such sharing arrangements take place.
This is particularly true for more complex group structures. Ultimately, a failure of the Tenant to follow the rules correctly can result in the Landlord being entitled to forfeit the lease, damages or an injunction.