Exiting Commercial Leases – What Are My Options?

In an ideal world, investment property commercial leases would run the length of their terms and renewal would be in each parties’ interests. The commercial reality is that businesses can struggle and fail, or they may rapidly outgrow their premises.

In today’s climate businesses seek more flexibility. Commercial property requirements are changing. Demand for shorter leases and serviced office space is increasing. So how does a tenant move on?

Commercial Leases – The Options

Where there is an existing lease, options can include:

1. Exercising a break right
2. Negotiating a surrender
3. Exiting whilst holding over

1) Exercising a Break Right

If the tenant has been well advised, the lease will contain a tenant break clause. This is a contractual right that will bring the lease to an early end.

It may read like this:

“Tenant may terminate this lease on [break date] by serving notice on the Landlord at least 6 months before the break date.”

This right is unilateral, i.e. it can be used by the Tenant but not the Landlord.

Note that having a break right in the lease and validly exercising it are very different things. It’s advisable to seek legal advice before exercising a break right. It may commercially disastrous if a tenant believes that it has validly exercised their right when it has not.

2) Negotiating a Surrender

Where there is no break right, either where date has passed or if none existed to begin with, then the tenant may consider a surrender.

A surrender is a consensual arrangement between landlord and tenant. It brings the lease to an end with immediate effect.
Whilst a lease may be surrendered without a formal agreement this is rare and can be risky. Realistically a landlord will want to be compensated for the loss of rent for the remainder of term, plus costs of finding new tenants.

In practice surrenders should be negotiated and documented. This can be done directly between parties. More often it is done with the assistance of agents and lawyers. Professionals are a vital part of the process. The landlord and tenant have conflicting interests and often unequal bargaining positions.

3) Exiting Whilst Holding Over

Section 24 LTA 1954 allows a business tenant to “hold over”. Their lease and right to remain in occupation continue by operation of law until a new lease is granted.

However, just because the term of the original lease has ended doesn’t mean the tenant has the right to immediately vacate.

Section 27 LTA 1954 provides a measure of protection to landlords in these circumstances. The tenant must serve notice on the landlord, giving not less that three months’ notice of their intention to vacate. After that the lease will come to an end.

Do You Require Advice on a Commercial Lease?

Next month I’ll be going over the exercising of break clauses in a little more detail. In December we will look at some of the ins and outs of negotiating a lease surrender.

Commercial leases are complex, and it is unwise to attempt to navigate them without the help of property law professionals. If you require any advice on entering into or exiting a commercial lease, our team would be happy to help.

Matthew Light
October 2019