The last year has been a difficult time for many businesses that have either been unable to open for trade, or who have seen their income drop but overheads stay the same. Whilst the government has tried to help as much as possible with the various measures they have introduced, the inability to trade and falling profits has meant many businesses are facing some tough decisions. The result is that some tenants are looking to exit their leases early, either because their business has failed and they no longer need the premises or they are looking to reduce overheads by off-loading underperforming locations. This article covers the options available to tenants who, for whatever reason, are looking to make an early exit from their lease:
This is where the lease is formally ended by entering into a deed of surrender. All continuing obligations under the lease are terminated and the tenant can potentially fully walk away. However, agreeing to an early surrender is solely at the landlord’s discretion. They are not obligated to agree and will mostly want some sort of financial recompense for loss of rent during any vacant period, remarketing costs and legal costs for a new lease. They will also most likely want their costs paid for the deed of surrender. There is also the issue of dilapidations and needing to agree a settlement for any existing wants of repair that need to be sorted to enable immediate re-letting of the premises, including the removal of any fit out works. So this is the best option for the tenant in terms of releasing themselves from any continuing liability but it is something that will need to be negotiated with the landlord. Given that tenants are few and far between at the moment, a landlord may take the view that they would rather keep a defaulting tenant on the hook than to agree a surrender and face an indefinite void period.
2. Break clause
It is fairly commonplace now for a break clause to be included in a lease. If you are considering exiting your lease it would be advisable to speak to us at the earliest opportunity so we can check if your lease contains a break clause and where necessary, a break notice can be served within the required timeframe. The rules relating to break clauses can be quite tricky and often there are conditions attached to the break which must be complied with in order for the break notice to be effective. There may also be a break payment to pay, so again taking early legal advice would be prudent.
As with surrendering, early termination of the lease via a break clause may give rise to a dilapidations liability. You will therefore need to consider the existing condition of the premises and the repair covenant in the lease – if the break is conditional upon yielding up in repair, then any works or removal of alterations will need to be done before the end of the lease.
This is where you transfer your lease to another person or company (the assignee). If you are transferring the lease as part of a business sale then the lease will form one of the assets of the business – as such an asset sale agreement may also be needed to document the sale of the assets. Most leases contains an alienation clause which requires you to obtain the consent of the landlord before the lease is transferred. This is so the landlord can assess the financial viability of the assignee and whether they will be able to pay the rent and perform the obligations under the lease. The landlord can’t unreasonably withhold their consent but they can stipulate reasonable conditions to the assignment. Often the landlord will require the outgoing tenant to enter into an authorised guarantee agreement – this essentially guarantees the obligations of the assignee whilst they are the tenant under the lease. So, if you are looking for a clean break, then you will not necessarily get that with an assignment. However, if the reason for the assignment is because the business is failing then there will be little point in the landlord insisting on an AGA. The outgoing tenant and assignee will each have their legal costs to pay and often the landlord’s legal costs are split between the outgoing tenant and assignee.
Again, if you are looking for a clean break then underletting may not be for you but it could a viable option where you want to generate some income from excess space that you do not currently need but that you may require back at some point in the future. Underletting will also need the consent of the landlord and again there will be costs to pay for this. You will still remain liable to the landlord for payment of the rent under your lease so if your undertenant were to default, you still have to pay the lease rent. If your business is already struggling, then a full surrender or lease assignment may be a more suitable option than underletting.
Whilst restrictions are now starting to ease, shops are reopening and people are getting back to the office, the full effects of Covid 19 on the commercial property market will continue to play out for many months or years to come. But transaction levels are starting to increase which shows that confidence is starting to return.
If you need advice on exiting your lease, or on commercial property matters in general, then please contact Helen Brewer on 0117 974 4100 or firstname.lastname@example.org who will be able to assist.