Commercial leases are binding agreements that typically hold tenants responsible for paying rent and fulfilling lease obligations for the full lease term.
However, circumstances change, and many businesses find themselves needing to relocate, downsize, or exit their office leases before the term expires.
Fortunately, there are legal avenues to explore that can potentially allow an early exit from a commercial lease.
In this article, we’ll explore the main strategies available to UK businesses and provide insights into each option.
Utilising a Break Clause
A break clause, if included in the lease, is one of the most straightforward ways to exit a lease early.
A break clause allows either the tenant, the landlord, or both parties to terminate the lease at a specific point or at regular intervals during the lease term.
Key Conditions
Break clauses usually require the tenant to fulfil certain conditions to activate the break, often called “preconditions.”
For example, you may be required to provide the landlord with a formal written notice (typically between 3 and 6 months in advance), settle any rent arrears, or ensure the property is maintained according to the lease terms.
Potential Pitfalls
Break clauses can be tricky, as minor oversights can render them invalid. For example, if you forget to pay a small amount of rent or fail to send the notice in the required format, you may forfeit the right to exercise the break clause.
In many cases, break clauses are “all or nothing,” meaning even a minor non-compliance could lead to your break attempt being denied.
Example
Let’s say your lease has a break clause at the three-year mark of a five-year lease. If you plan to exercise it, review your lease well in advance. Ensure that you meet all conditions, such as clearing outstanding payments and giving proper notice to the landlord.
Consulting with a solicitor to guide you through this process can help you avoid mistakes and ensure you meet all the necessary legal requirements.
Assignment of Lease
If a break clause isn’t available or feasible, lease assignment may offer an alternative solution.
An assignment transfers your lease obligations to a new tenant who assumes responsibility for the lease for the remainder of its term.
Here’s what you need to know:
Landlord Consent
In most cases, lease assignments require landlord approval. Landlords have a vested interest in ensuring that the incoming tenant has a similar financial standing and business stability.
Your landlord may request financial documentation or credit checks on the new tenant to verify their viability.
Tenant Liability
In some leases, you may still be liable if the new tenant defaults, known as “privity of contract.” This is particularly common in older leases signed before 1996.
Always confirm with your solicitor whether you would retain liability for the lease if the assignee defaults, as this could result in unexpected expenses down the line.
Example
Imagine your business has outgrown its current office, but two years remain on the lease. You identify a startup willing to take over the lease under the same terms, and you apply to the landlord for consent to assign the lease. After conducting a financial review, the landlord agrees. However, you later find out that the lease holds you liable in the event of non-payment by the startup, so you proceed with caution and consider whether this option aligns with your long-term risk tolerance.
Subletting
Subletting, or underletting, allows you to lease the office space to a third party while retaining the primary leasehold interest. Unlike assignment, you remain responsible for the lease and any terms or conditions.
Lease Permission and Restrictions
Some commercial leases restrict or outright prohibit subletting. If allowed, you may be limited in terms of rental rates or lease terms you can offer to a subtenant.
For example, some leases mandate that subletting must be at the same rent or higher to avoid rent devaluation.
Tenant Liability
Since you remain liable for the lease under subletting, any breach by the subtenant could impact you. Additionally, as the head tenant, you may need to handle any repairs or maintenance that fall under the lease obligations.
Example
Suppose your business needs to relocate due to expansion, but you have 18 months left on your lease. Your landlord permits subletting, and you find a smaller company interested in the space. You draft a sublease agreement, but the primary lease states that rent should not be less than what you currently pay, meaning that you may need to subsidise part of the sublease rent if the market rate has dropped.
Negotiating a Surrender
If the previous options are unavailable or unsuitable, negotiating a lease surrender may provide a feasible exit.
Lease surrender involves reaching a mutual agreement with the landlord to terminate the lease before its natural end date. However, surrenders are at the landlord’s discretion, so you may need to provide financial incentives.
Surrender Costs
Landlords typically expect compensation to offset potential void periods (time without a tenant) or the cost of finding a new tenant. The exact amount can vary, but it may include an upfront payment equivalent to a few months’ rent or, in some cases, covering the landlord’s re-letting costs.
Example
Consider a scenario where your business needs to reduce office costs due to economic downturns. You propose a surrender to the landlord and agree to cover three months’ rent as compensation. The landlord, needing to re-let the space in a challenging market, accepts the arrangement to avoid a prolonged vacancy.
Legal Considerations and Final Thoughts
Exiting a lease early is a complex process, and UK commercial lease law is stringent regarding tenant obligations. Here are some additional considerations to keep in mind:
Dilapidations and Repairs
When ending a lease, you’re typically responsible for returning the property to its original or agreed condition, known as dilapidations. If the property has experienced wear and tear or requires repairs, the landlord may seek financial compensation. Dilapidation claims can be substantial, particularly for older properties, so factor this into your plans. At Constructive Space, we quote and carry out dilapidation work, often at a fraction of the price of the landlord’s compensation fee.
Legal Advice
Commercial leases are legally binding documents with potential pitfalls. Minor errors in exercising a break clause or misunderstanding the assignment process can be costly. Consulting a solicitor experienced in commercial leases is essential to provide peace of mind and help you navigate potential complications.
Review Lease Terms Carefully
Before committing to any strategy, review the lease terms carefully. Confirm whether the lease allows for a break clause, subletting, or assignment, and note any conditions tied to these options. Terms related to rent, dilapidations, and landlord consent can heavily influence your decision-making.
Conclusion
Getting out of a commercial lease early in the UK involves careful planning, understanding your lease terms, and evaluating all potential options.
Break clauses, assignment, subletting, and negotiated surrender each come with specific benefits and risks.
Consulting a legal professional and carefully assessing your business’s needs can help you make a decision that aligns with your financial and operational goals. Whether your business is growing, downsizing, or facing other challenges, there is usually a solution that can ease your exit from an office lease.
Need help? While we’re not a legal service, we are well connected with some of the most respected commercial property lawyers in London and throughout the UK. Please contact us and we’d be happy to introduce you free of charge.
