Every lease comes to an end eventually, either because it's the end of the period for which it was granted ('the term' or 'lease period') or because the landlord or the tenant takes active steps to end it early. A lease is a contract that binds both parties. Your landlord cannot end your lease early unless he has a specific right to do so, and you cannot end your lease just because you do not want it any more or cannot afford the rent. This means that right from the outset, when you are negotiating the lease agreement, you should consider the term of the lease and more particularly how long you want the lease to last and in what circumstances you might want to exit early.
Our commercial property solicitors can help you plan for different scenarios and make sure that what you need is negotiated and written into the lease. In this guide, we discuss the different ways your commercial lease could end and what the impact will be.
Contents:
- How can a tenant end a commercial property lease?
- What is a break clause?
- How can I surrender my lease?
- If the lease comes to the end of the term, will it end automatically?
- What should a tenant do in preparation to leave?
- What happens to security deposits if the lease ends early?
- How long before termination or expiry should I be planning for my exit?
- What options are available if a landlord refuses to terminate a lease early?
- Summary
How can a tenant end a commercial property lease?
There are three main ways a tenant can end a lease:
- Wait for the lease to end. In the modern business world, leases have become shorter (typically they now last for less than 7 years and frequently no more than 5). As long as you know when the lease ends and plan accordingly you can find a new property and leave your existing one.
- Exercise a break clause
- Surrender the lease
What is a break clause?
A break clause allows you to serve a notice ('a break notice') that ends the lease on a particular date. There are two main types of break clause:
- A fixed date notice (i.e. a notice which brings the lease to an end on a particular day and no other)
- A rolling date notice (i.e. one which allows you to serve a notice on or at any time after a particular day)
In either case, you must comply with the provisions of the lease both at the time the notice is given and when the lease ends. If you do not do so, the notice may not be valid and the lease will not end. In the case of a fixed date break clause this can be tricky. Typical conditions that must be complied with include:
- The date. If the date is stated in the lease (e.g. 6th May) it should be stated in the notice. If the date is only described (e.g. 'at the end of the 3rd year of the term', you should use that exact wording in your notice.
- The length of notice. If your lease says you must give at least six months notice, it is no use giving less than that. In the case of a fixed date notice, if you cannot give the minimum amount of notice, then you have lost your right to end the lease early. Beware of any lease which requires you to give an exact period of notice as this is almost impossible to do.
- Who must receive the notice? This is usually the current landlord but the break clause will stipulate if the notice needs to be received by any other third party.
- Where does the notice have to be served? The lease should normally state an address where notices must be served but these can change. Make sure that you keep and comply with any notifications from your landlord that the address for service of legal documents has changed.
- How does it have to be served? If the notice has to be served by hand, then do not post it. Deliver it personally and take a photograph of you doing so. If it says it must be served by first class post, do not send it second class. As one judge noted, if the break clause says you must serve the notice on pink paper for it to be valid, that is what you must do!
- Pay the rent and any service charge when due. Almost all break clauses require rent and other payments to be up to date when the lease ends. While the rent dates are probably fixed, the same may not be the case for insurance payments or maintenance charges. If one of those arrives the day before you are due to serve the notice or move out, you may find yourself confronting a major problem. In no circumstances attempt to apportion the payments. If the day before the break date you must pay 3 months' rent, then you must pay 3 months’ rent whether the landlord is obliged to pay it back.
- Give up the lease with 'vacant possession' and in compliance with the terms of the lease. It is hard enough to do this at the end of the lease. Some leases also insist that all the terms of the lease must have been complied with when the break notice is served. This is almost impossible. In that event you could find that your break clause is not worth the paper it is written on. If possible, it is best to not have such a clause included in your lease.
How can I surrender my lease?
You can only surrender your lease if your landlord agrees to you doing so. They are under no obligation to consider your request and are entitled to refuse it. You cannot use this as an excuse not to pay your rent. Your landlord is most likely to agree to you surrendering the lease if they want the property back to redevelop it, or if they want to rent it to what they regard as a better tenant or at a higher rent.
There are two types of surrender:
- Express surrender in writing. This is a written document which sets out the terms of the surrender.
This can include not only the date of the surrender and the apportionment of rent and service charges that you may have overpaid, but other matters such as:- Whether you will have to pay the landlord to be released from the lease
- Whether you will be liable for the cost of repairs to the propertyWhether you will be responsible for any claims that arise under the terms of the lease after it has come to an end
- Whether you will have any rights against the Landlord if you discover any breaches of the lease by the Landlord after the lease has ended
- Implied surrender by conduct.
You can move out of the property you leased, simply hand your keys back and the lease will come to an end, but only if the landlord agrees to accept your surrender. Many tenants have thought they can simply post the keys through the landlord's letter box and the lease is ended. This is not true and without a document from the landlord, not only do you not know if the landlord has accepted the surrender, but you also do not know on what basis they have accepted and could find that they sue you for rent arrears, service charge arrears, damage to the property and compensation for your attempt to leave the property without the landlord's agreement. Unless you are absolutely certain that the landlord is agreeable to your departure, you should not attempt to imply a surrender by relying on your and the landlord's conduct.
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If the lease comes to the end of the term, will it end automatically?
Not necessarily is the answer. Some leases continue automatically after the term in the lease ('the contractual term') comes to an end because they have security of tenure. Security of tenure refers to the legal right of a business tenant to continue occupying the leased premises after the expiry of the lease term. In those circumstances, the lease continues until someone takes steps to end it. From the tenant's point of view, you can either:
- Serve a section 26 Notice
- Serve a section 27 Notice
When would I use a Section 26 Notice?
This is a procedure set out in Section 26 of the Landlord and Tenant Act 1954 ('the LTA'). It is a request for a new lease which has the effect of ending the current lease. You will not generally use this procedure if you wish to leave the property you are currently occupying. You might wish to end the current lease if, for example, the rents payable for leases like yours have dropped and you want to negotiate a decrease in your rent or better terms. You would most probably let the lease continue until ended by the landlord at which point you would be entitled to ask for a new lease at the then current market rent.
When would I use a Section 27 Notice?
If your landlord shows no sign of ending the lease, to prevent it continuing you can serve a notice under Section 27 of the LTA. This permits you to either a) at least three months' of the term to serve a notice ending the lease on the contractual expiry date or b) at least three months' notice ending after the contractual expiry date.
The section 26 and Section 27 procedures are mutually exclusive. Once you have served one you cannot normally withdraw it and serve the alternative. A Section 27 notice in particular means you give up all rights you have to renew your lease or stay in the property after the lease expires. Do not serve this unless you really want to move!
What happens if a no-one serves a notice?
The lease will continue until someone does something to end it either by serving a notice or accepting an implied surrender. Do not think that just by moving out the lease will come to an end. This only works if you vacate the property completely before the last day of the term, return the keys and are no longer in occupation. Otherwise, unless a notice is served, the lease will continue, and you will remain liable to pay the rent and service charge and comply with all the terms of the lease and even then, you may still find yourself liable for the period of the notice (typically three months if you give it or six months if your landlord gives it).
What should a tenant do in preparation to leave?
Aside from obvious steps like reading the meters and informing the rating office that you are moving, there are various specific legal steps you need to take:
- Most leases require tenants to keep the property they are leasing in full repair and to hand it back to the landlord in that state and, usually, fully decorated. You may not wish to do this, in which case you can expect your landlord to charge you for the cost of doing so. You should try and insist that your landlord inspects the property early and tells you what they require you to do so that you have time either to do it or challenge the landlord on why you do not need to do it.
- Give vacant possession when you leave. In this context, vacant means completely empty so that the next tenant can move in as if you had never been there. It has been known for tenants to leave a bag of rubbish in the property (clearly expecting someone else to move it for them) and they were held not to have given vacant possession. This can mean either that a break clause or notice is ineffective, and the lease continues or, if the lease has technically ended, the tenant is deemed to be 'holding over' on terms as close as possible to those that would have been in existence had the lease not ended.
- If your lease was originally for more than seven years, it is most likely registered at the land registry. You should take steps to close these entries or ensure the landlord does so to avoid people checking the register and thinking you still have an interest in the property.
What happens to security deposits if the lease ends early?
Rent deposits are often paid upfront at the start of the lease to the landlord as security for payment of rent and performance of the tenant’s obligations under the lease. When a commercial lease ends early, the fate of the security deposit depends on the terms laid out in the lease agreement and the circumstances surrounding the early termination. If the tenant is terminating the lease prematurely and there is no outstanding rent or monies owed on account of damage/repairs to the property, the security deposit should be returned to the tenant (plus any interest accrued if provided for under the lease). If there are any arrears or damage to the property, the landlord may use the security deposit to cover these costs before returning the balance to the tenant.
If a tenant assigns the lease, the treatment of the security deposit can vary based on the terms of the lease or agreement negotiated between the landlord, the existing tenant, and the new tenant.
The landlord may return the existing security deposit held for the outgoing tenant (subject to any legitimate deductions) and require the assignee to provide a new security deposit for its obligations under the lease. It may be agreed that the existing security deposit is transferred from the outgoing tenant to the new tenant, with the latter agreeing to take on the responsibilities associated with the deposit as part of the assignment process.
What happens when my lease has ended?
You might think that once your lease has ended you are free of all your duties under it but, sadly, that is not often the case. The period in which you are allowed to use the property you rented may have ended but many of those obligations you agreed to when you signed the lease continue until you have fully complied with them or been released from them.
What happens if I don't vacate?
This depends on what the surrounding circumstances are.
- If you are trying to exercise a break clause, you may find that you have not ended the lease at all which will leave you liable for the rest of the lease term or until your next break date comes along.
- If all you have done is not move out all your equipment or left some rubbish behind, you may find the landlord charging you to store it or dispose of it.
- If your lease has ended but for some reason you do not move out at all, then you are a squatter and can be removed either by court action or by the landlord simply entering the property and changing the locks. You will also have to pay the landlord compensation, usually at the market rent for the property you have vacated.
What happens after I have vacated the property?
Your (now ex-) landlord will be seeking to relet the property as quickly as possible at the highest rent they can get and at the least expense. Unless the landlord is planning on a complete redevelopment of the property or a substantial refurbishment, they will want to hand the property to a new tenant in the best condition they can – in full repair and fully decorated. Either just before you leave or shortly after, they will inspect the property to ascertain its state of repair. If, at the start of your lease you did not agree that you could hand the property back in a lesser state of repair (e.g. by excluding fair wear and tear) then you have to give the property back to your landlord in that state of full repair. Almost all leases require tenants to decorate in the last year of the term and usually in colours approved by the landlord, so it won't be off-putting to a prospective new tenant.
How long before termination or expiry should I be planning for my exit?
The simple answer is before you sign the lease in the first place, this will allow you to instruct your lawyer to negotiate terms that will not be a surprise when your lease ends. You should note all the possible end dates for the lease and any notice period you must give in your internal records and make sure you remember them.
It is worth considering what you intend to do at whatever end date is coming, usually a year before you need to act. If you have a lease with a first break date after only two years on which you must give 6 months' notice, you should start considering your next steps only 6 months after you move in. This may sound ludicrously early, but you will be surprised how time flies when you must serve notices and find new property.
If the lease is ending come what may, you must plan ahead. You do not want to turn up at the office one day and find the landlord has locked you out and is presenting you with a large bill for repairs that you should have done!
What options are available if a landlord refuses to terminate a lease early?
If there is no possibility of exercising a break clause or negotiating a surrender of the lease with the landlord, a tenant who needs to exit a lease before it ends might wish to explore assigning the lease to a third party. Whether this is a possibility will depend on the terms of the lease. If there is an express prohibition by the landlord against assignment, you could always try to negotiate an agreement with the landlord. It is common for modern commercial leases to permit the assignment of the lease subject to the landlord’s consent. The landlord will often seek to impose conditions on providing its consent, to ensure any incoming tenant taking over the lease is reputable and of sound financial standing. Landlords will typically also require any outgoing tenant to guarantee the incoming tenant’s obligations under the lease as a security/recourse should they falter – therefore you are not completely off the hook but provided there are no issues, tenants can essentially move on before the end of the contractual lease term while the incoming tenant takes over/steps in for the remainder.
The other option is subletting the premises to another tenant, who would cover the rent for which you remain liable. You will also continue to remain liable to the landlord for all other obligations as per the lease, but the terms of the sublease will likely be similar to yours to avoid any discrepancies. This is a more hands-on approach, as you will likely be responsible for managing the subtenant and act as the first point of contact for any queries or concerns raised. It does provide a mechanism for you to leave the premises before the end of the contractual term and install another tenant to cover the rent in the meantime (depending on the length of the sublease negotiated).
Summary
It is important you understand from the outset the various ways in which it can be ended. Tenants can find themselves on the hook if they do not vacate the premises properly in line with the lease, or if there are any dilapidation claims. It is crucial to consult with an experienced commercial property solicitor well in advance to ensure you understand your rights and obligations in preparation for a smooth departure. If you are a landlord or tenant faced with the end of a lease, our friendly commercial property team here at Harper James are here to help.
