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Businesses who lease premises but whose workforce may not all return to work when COVID-19 restrictions are eased are considering whether to look for smaller premises, or to reduce the space they rent – but need to know how they can get out of their existing lease, or vary it, to achieve what they want.
What are your options?
Options depend on your lease. You may be able to:
Termination under a break clause: If you can terminate at a specified point, because there is a ‘break clause’ in your lease, you may have no continuing liabilities to the landlord. Check the notice you have to give – often it will be six months - and that you have complied with conditions in the lease, such as keeping the premises in repair.
Note that even the smallest of breaches may lose you the right to terminate. The courts have been very strict – for example:
This last issue can be a particular trap if there has been an informal agreement that rent will be paid monthly, to help cash flow.
If you do not want to leave, but only reduce the space you rent, the fact a break clause is coming up will help you significantly. Your landlord may be willing to let you reduce the space you rent, or move to a different, smaller part of the premises for less rent.
Termination - no break clause: If you can negotiate termination with your landlord, you may have no ongoing liabilities to them. They will try to get you to pay costs such as fees for terminating payment of their professional fees and payment for repairs and redecoration.
The number of businesses looking to get out of leases may mean your landlord is reluctant to let you go, if they think they will struggle to find a replacement tenant. Be prepared for hard negotiations. It is likely to be only slightly easier if you want to stay but reduce the space you occupy.
It is possible that under the terms of your lease the COVID pandemic gives you grounds to end the lease, but that would be very unusual.
Termination if near to or at the end of contractual term: Some leases are protected which means that after the end of a contractual term they will continue by virtue of the Landlord and Tenant Act 1954 (LTA 1954). It is possible to simply give up possession and fully vacate the premises at the end of the contractual term but this can carry risk. You can serve a section 27 notice to expire on the contractual expiry date (not before) providing at least three months’ notice is given. You can also serve the notice to expire after the contractual expiry date, again providing three months’ notice is given. This process can be quite technical and there are limitations on when a section 27 notice can be served.
Assigning: Finding a new tenant to take over your lease - someone to ‘assign’ it to - is usually the best way of realising any value it has. However, leases for fewer than three years often prohibit assignment or you may need your landlord's consent (although usually it cannot be unreasonably withheld). There may also be restrictions on use that limit who you can assign to.
If you can assign, you will usually have legal liabilities for all future payments owed by future tenants, or have to guarantee some or all of the next tenant’s payments. The landlord will try to negotiate other payments from you that you may be able to pass on or share with the new tenant.
Assignment negotiations can cost more and take longer than negotiations to terminate. First, you have to find the new tenant, and may have to pay an agent to help. Second, you have to negotiate with both the new tenant (issues such as who will pay the landlord’s professional fees, and will the new tenant pay you a premium or vice versa?) and the landlord.
If your lease has less than two years to run it is often better to negotiate to terminate the lease, to avoid the costs and risks of assigning it.
Sub-letting: Rental from sub-letting could cover part or all of your rent and leave you free to move but sub-letting won't get you out of the lease - you retain all your liabilities as a tenant and you have the additional burden of managing your sub-tenant.
Sub-letting may not be allowed - check the lease for restrictions on sub-letting - or you may need the landlord's consent. You cannot usually get around the prohibition by licensing space to someone else rather than sub-letting, as licensing will usually be prohibited in the lease too.
Surrendering: In better times landlords will often allow a tenant to surrender their lease – simply ending it – but this is unlikely to be attractive to them unless they have other plans for the property, such as developing it. If they have to find another tenant if you leave, surrender is not an attractive option for them. If you have a new tenant lined up for the landlord, it will help greatly. You can surrender, and the landlord can grant a new lease to the new tenant (as opposed to you assigning the existing lease to them for the remainder of its term).
No matter how the lease comes to an end, there can often be termination liabilities. For example:
Check your lease for termination liabilities.
Strengthen your hand
Whether negotiating an assignment or termination, put yourself in the landlord’s shoes:
It is crucial when considering the best way to end your lease to seek legal advice at an early stage as there are often technical issues which need to be considered.
May 5, 2021
Kirsty is a Solicitor and Partner and Heads the Commercial Property department.