Getting out of my lease what are my options?

In the current economic climate, the one constant for your business is the notion of change. To prepare your business for change is to plan for success. Change can include an adjustment to your property requirements (whether upgrading or

downsizing). Understanding how to prepare for this and assessing your options can save you time and money.

Disregarding breach or insolvency arrangements, there are potentially four key options that may be available to you where you hold a lease. Where you are looking to take on a lease, it can also be important to bear these considerations in mind.

Break Option

What is it? It is a right for the tenant to be able to terminate its lease on specific date or dates (the break dates).

What should I do? Your lease needs to be reviewed. Not all leases contain break options. They will only be included where they were negotiated when the lease was being granted. If the lease does include a break option, its terms need to be considered carefully. The operation of the break is likely to be strictly regulated – both in terms of the date(s) on which the break can be exercised (with minimum prior notice being required to be given) and the conditions that need to be satisfied (such as payment of all arears and possibly the state and condition of the property). If the conditions are not complied with then the right to break could be lost.

How much will it cost? This can be the most cost-effective way of getting out of your lease provided that a break date is approaching. You will need to budget for your own legal costs which will be limited to service of the notice. Once you break your lease, you will have no ongoing further liability in respect of the property (rent and rates etc) but you are likely to remain liable under the lease to the landlord for any previous breaches, such as dilapidations.

Surrender

What is it? It is an agreement between the landlord and the tenant by which the lease is terminated. It is an agreement to be negotiated between the parties; there is no obligation on the landlord to accept a surrender or to be reasonable in any negotiations for one.

What should I do? Approach the landlord to negotiate a surrender of the lease. The landlord may agree only on the basis that certain conditions are met. If there is likely to be an income void following the surrender, the tenant may be required to pay monies to the landlord to reflect the loss of income/rent, the landlord’s exposure to rates and other outgoings and, possibly, the cost of putting the premises into repair (in compliance with the tenant’s lease obligations).

How much will it cost? The landlord may request a payment as part of a deal to surrender the lease. You may also have to pay for the landlord’s professional costs (including surveyor’s and legal fees) as well as your own legal costs in negotiating or documenting the surrender.

Assignment

What is it? It is the transfer or sale of the lease to another party.

What should I do? Check your lease to establish that the tenant has the right to assign the lease. If there is no absolute prohibition on assignment it is commonplace for assignment to be allowed subject to landlord’s consent being obtained (which is not to be unreasonably withheld). The lease may require (or it may be a reasonable landlord requirement) that you, as outgoing tenant, guarantee the obligations of the new tenant; additional requirements or conditions may also be imposed (such as a guarantor or rent deposit for the new tenant). Once it has been established that you have the right to assign, you will need to market the property (via an agent) in order to identify potential purchasers. Where a purchaser is lined up, landlord consent (if required) for sale of the lease to that purchaser will need to be applied for.

How much will it cost? There is likely to be an obligation on you under your lease to pay the landlord’s costs (including surveyor’s and legal fees) as a pre-condition to an assignment. You will also need to budget for your own surveyor’s and/or legal costs in dealing with both obtaining landlord’s consent and addressing the sale to the prospective purchaser. Following completion of the sale of the lease, depending on the lease/landlord requirements, you may continue to have ongoing liability to the landlord where you are required to provide a guarantee to the landlord.

Underlease

What is it? It is a lease granted by you (as tenant) out of the existing lease to a third party (undertenant). The underlease can relate to the whole or part only of the premises let to you. You will remain as the tenant under the existing lease with the same liability under your existing lease, i.e. paying the rent, doing repairs, etc. The undertenant, however, will pay you a rent (which you can then utilise to pay the rent due to your landlord under your lease) and, under the terms of the underlease, may also be responsible for carrying out repairs. Obviously an undertenant will also mitigate the burden of the rates and outgoings (by paying those direct or paying you a contribution towards them). The point to note here, however, is that you will remain liable to your landlord notwithstanding the grant of the underlease; if the underlease/undertenant fails, you will still be liable to pay the rent under your lease and to procure compliance with the lease obligations.

What should I do? Again, check your lease to determine if it includes the right for you to be able to underlet the property. If you do have this right, it may be conditional upon receiving the landlord’s consent. There are likely to be conditions and restrictions to the grant of any underlease; for example, you may only be permitted to underlet the whole of the property. Once the right to underlet has been established, you will then need to identify a prospective undertenant (possibly via an agent) before applying for landlord consent (where required).

How much will it cost? Similar to an assignment, there is likely to be an obligation on you under your lease to pay the landlord’s costs (including surveyor’s and legal fees) as a pre-condition to granting consent to any underlease. You will also need to budget for your own surveyor’s and/or legal costs in dealing not only with landlord consent but also the grant of the underlease itself.

Conclusion

If your property requirements have changed or there is potential for them to change, review all the options at an early stage. Regardless of which option may suit you best, the importance of seeking legal advice at the outset and assessing the available options cannot be over-emphasised. We can help you plan for your property requirements by advising you on the terms of your lease, negotiating the right deal for your business, addressing the legal requirements and assisting you through the process.

This information is provided for guidance purposes only on general principles and should not be regarded as a substitute for taking specialist legal advice.

For more information on commercial property matters contact Anna Austin via email anna.austin@battens.co.uk