How to surrender a commercial lease

How to surrender a commercial lease

Approaching your landlord seeking a route to exit a commercial lease might seem daunting, but surrendering a commercial lease can benefit both parties. As a tenant, you can free yourself of a financial obligation that may have become difficult to meet or find a space that better suits your needs. Landlords, on the other hand, may welcome the opportunity to find a new tenant on improved terms or sell or redevelop the property. 

If you are considering ending a commercial lease early, it’s important you understand your options, know how to surrender a lease and are fully aware of the potential implications. 

What is a lease surrender?

A commercial lease surrender is a mutual agreement between a tenant and landlord to terminate a lease before the date on the original contract. By bringing the lease to an early end, the landlord regains control of the property and the tenant is no longer liable for future rental payments.  

It’s usually the case that a tenant instigates the lease surrender process, most commonly because they are struggling to pay the rent. It’s then up to the landlord to consider whether surrendering the lease suits them and to negotiate terms.

When negotiating, the landlord may seek to retain the deposit or request other payments to ensure there’s no interruption in their income, and to make sure other liabilities, such as business rates, are paid. Both parties can decide not to accept a lease surrender.   

How does a lease surrender work?

A commercial lease is surrendered when both parties agree to terminate the lease before it’s due to end. The date of surrender will usually be several months in advance to enable the tenant to make the necessary repairs, sell stock and prepare for their exit. The landlord can use this time to market the property and find a new tenant.

There are two ways to surrender your tenancy:

By deed of surrender

A deed of surrender is a legal document a landlord and tenant sign to bring a lease to an end. It’s a binding contract that sets out the rights and responsibilities of each party. This is the most common form of surrender and is legally required for commercial leases made by a deed with a term of three years or more.

The surrender deed will state the date when the lease ends and include the terms of the surrender. For example, there could be outstanding payments the tenant must make, such as rent or service charge arrears, outstanding repair costs (known as dilapidations) or charges that will become due when the landlord carries out the annual reconciliation.

As well as the tenant and landlord agreeing to the surrender, the landlord must also seek the consent of their mortgage provider, if they have one. That’s because the surrender could represent a breach of their mortgage conditions.  

Implied surrender by conduct

If there are no rent arrears or other liabilities to settle, you may be able to surrender the tenancy without a formal document. Known as a ‘surrender by operation of law’, the tenant’s and landlord’s conduct must show the surrender of the lease is accepted by both parties.

That is usually symbolised by the tenant leaving the property, removing their possessions and handing back the keys or their part of the original lease documentation and the landlord accepting them. At that point, the lease will end.

What are the other ways to end a commercial lease early?

Before you voluntarily surrender your property, it’s worth considering the other routes to end a commercial lease before its end date. The alternatives include:

• Break clauses - The first thing to check is whether the lease has a break clause. Not all commercial leases contain break clauses, but if you do it can be a cost-effective way to end the lease as long as you serve your notice correctly.
• Assignment - This may not be an easy option as the existing tenant must find a replacement tenant to take over the lease. The landlord must also approve the new tenant. If they agree, you can transfer the lease and the new tenant will become liable for the rent and the other obligations contained in the lease.
• Subletting - Rather than transferring the lease, the existing tenant may be able to rent all or some of the space to a third party under a sublease agreement. You will usually need the landlord’s consent to sublet, but it can be an effective solution for both parties.

How much does it cost to surrender a lease?

That depends on the particular terms of your lease. The following are the costs that will usually apply:

Surrender fee: The landlord may ask you to pay a fee before surrendering your tenancy. It may not be written into the terms of your lease and can be negotiated with your landlord.

Outstanding charges: A lease surrender removes your obligations from the date of the surrender but it does not wipe the slate clean. If you owe your landlord for outstanding rent, service charges or repairs, they will want to recoup those payments. A professional lease advisory team can help you negotiate a favourable settlement. 

Lost rental income: The landlord may also ask you to make a payment to cover the income they’re likely to lose by agreeing to end the tenancy early. 

Payments in advance: Rent and service charge payments are often made quarterly and in advance. If you surrender a lease, the money you have paid in advance will not necessarily be refunded but the landlord may be prepared to negotiate a refund as part of an overall settlement.

Legal and professional fees: You may require professional assistance to review your lease conditions and negotiate a surrender with your landlord.   

What are the implications of a lease surrender?

If you want to surrender a commercial lease, here are a few things to consider before contacting your landlord. 

Making repairs

As a tenant, you will usually be required to return the premises to the standard of repair it was in at the start of the lease. That could require repairs and reinstatement works that interfere with business. An alternative to doing the work could be to agree on a dilapidations claim with your landlord.   

The impact on guarantors and subtenants

You should also consider the impact on guarantors, subtenants and other parties. If you have a guarantor for your obligations under the lease, their responsibility for future liabilities will end on the surrender date. However, they can still be held liable for outstanding costs. If you have a subtenant who rents space from you, the landlord will become their direct landlord when you surrender the lease.  

Liability for business rates

As a landlord, you will become liable for business rates if the property remains unoccupied for over three months. That’s something to factor in when deciding whether to agree to the voluntary surrender of your property and negotiating an appropriate settlement. 

How we can help

Our experienced lease advisory team can provide practical advice and assistance to help you surrender or exit a commercial lease on favourable terms. Find out more about our lease advisory service or get in touch to discuss negotiating or drafting a deed of surrender and your other options for terminating a commercial tenancy. 

What is an FRI lease?

The majority of commercial leases are classified as ‘Fully Repairing and Insuring’ (FRI Leases). FRI Leases hold the tenant liable for all maintenance and insurance costs from the commencement of the lease. It is then the tenant, and not the commercial landlord, who is responsible for ensuring the property is fully compliant with building regulations, health and safety legislation and for the general every day maintenance of the property.

The commercial landlord, however, is not omitted from all maintenance responsibility. In many cases, unless the tenant is the sole occupant of a building, the commercial landlord may retain some, or all, responsibility for the maintenance of common areas and, in some cases, for the exterior of the property. In many cases commercial landlords are also responsible for aspects such as the safety of the premises’ wiring system etc.

What are the tenant's responsibilities?

If alterations are to be made to the premises (for example, to bring the building fit for the purpose of the commercial activity), the tenant is also liable for these costs under the terms of a standard FRI Lease. In many cases the terms of the lease will state that permission must be sought from the landlord. However, in this case, there is legal precedent for the reaction to this request. The Landlord and Tenant Act 1927 (Part I) states that if permission is to be sought for alterations, then the landlord cannot withhold their consent if the request is reasonable (although note that this is not the case under Scottish law). The Act also states that in cases where there is an absolute prohibition in the lease of alterations being made to the property, then the tenant has the right to apply (under section 3) to the landlord for permission and then be compensated at the end of the term.

Are FRI leases negotiable?

If the terms of a standard FRI commercial lease appear off-putting to a new business owner, then there is some light at the end of the tunnel, as many aspects of an FRI Lease are negotiable. For example, if at the commencement of lease negotiations it is discovered that the property is not in an acceptable condition for tenancy, it is possible to insert covenants into the lease to protect the tenant against future repair or dilapidation costs. For instance, certain areas, e.g. the roof, could be removed from the maintenance and repair obligation. Alternatively a schedule of condition could be annexed to the lease showing the state of the premises at the date of entry and specifying that the premises will be returned in no worse, but no better, condition at the end of the lease. It may even be possible to exclude from dilapidation costs anything that could be classed as fair ‘wear and tear’.

Who is responsible for maintenance of domestic properties?

The onus for maintenance being on the landlord in domestic properties however is not reflected in the vast majority of commercial leases.

If you are a landlord, or tenant, and would like to receive more advice on your responsbilities in your commercial property lease, contact one of our lease advisors today.