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New practice: Getting out of a lease

Author: Atom Content Marketing

Published: 01 Apr 2021

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:

  • Terminate the lease, under a break clause.
  • Negotiate termination with the landlord.
  • Assign the lease - ie sell it on to a new tenant.
  • Sub-let the premises, or part of them.

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:

  • You often cannot give notice by email.
  • Mail is often only deemed to arrive several days after you actually post it, even if in fact it arrives earlier.
  • If the lease says you have to give vacant possession when you leave, you may be in breach if you leave anything at all behind, such as partitioning that you installed.
  • If the break falls between quarterly rental payment dates you often have to pay the full quarter’s rent in advance in any event, rather than just an apportioned sum.

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.

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).

Strengthen your hand

Whether negotiating an assignment or termination, put yourself in the landlord’s shoes:

  • Are there any potential reliable new tenants out there for your premises? The more there are, the more reasonable the landlord is likely to be with you.
  • Does the landlord have cashflow problems? If so, the landlord may want a quick agreement.
  • Has the landlord breached the lease? Use that in your negotiations.
  • You need judgement, experience and a good knowledge of the local market so use both your own - and your adviser’s - negotiating skills.

Operative date

  • Now

Recommendation

  • Business tenants whose workforce may not all return to work when COVID-19 ‘work from home’ rules are eased should consider whether they are able to get out of their existing lease, or vary it so they are renting a reduced space.
Disclaimer

This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

Copyright © Atom Content Marketing

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