As a general rule a commercial lease will run for the full length of the contractual term with all payments due under the lease being payable in full during that period. However, tenants could have various options available to them to get around this:
Break Clause
The lease may contain a tenant break clause where a tenant can serve notice on the landlord to break the lease. A break clause normally requires service of the notice to be in writing within a certain number of months prior to a break date (E.g. 6 months).
The break is regularly subject to conditions such as; all payments due under the lease being paid in full up to the break date, there being no subleases or occupiers at the break date and all lease covenants being complied with. In some cases there may be a break penalty payment payable.
Correct service of the break notice and compliance with all of the break conditions is strict. If the notice is served incorrectly and/or the conditions are not complied with then it may be that the tenant is unable to successfully terminate the lease.
Assignment
A tenant could assign a lease to a new tenant if the lease allows. Leases routinely contain a clause allowing assignment of the whole of the Property subject to obtaining a landlord’s consent (not to be unreasonably withheld). Assignment is typically subject to certain conditions.
The most common condition is that the outgoing tenant has to enter into an authorised guarantee agreement with the landlord to guarantee the performance of the incoming tenant. The outgoing tenant therefore needs to consider the incoming tenant’s ability to comply with the lease covenants, given that the outgoing tenant will be guaranteeing the incoming tenant’s performance.
Underletting
If the lease allows, the tenant could underlet the property. Underletting is likely to be of the whole of the property only (but can sometimes allow underletting of a permitted part) and with landlord’s consent (not to be unreasonably withheld). Underletting can be subject to conditions such as; the rent not being less than the open market rent, an undertenant covenanting directly with the landlord to perform the lease covenants and the underlease being no less onerous than the lease. A tenant would still be liable directly to the landlord for complying with the terms of the lease and the subtenant liable to the tenant under the underlease.
Surrender
A tenant might be able to negotiate a surrender of the lease with their landlord. A landlord may require a surrender payment in order to agree to this. There may also be dilapidations payments to consider if the property has not been kept in good repair or if there have been other breaches of covenant by the tenant. The surrender would have the effect of releasing the tenant from its liabilities under the lease from the date of the surrender.
If you’re considering ending your commercial lease early and would like some guidance, please don’t hesitate to contact our Commercial Property team.
(June 2022)