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Commercial Lease Termination- How to Terminate a Commercial Lease

In a perfect world, all commercial leases would be flexible, allowing business tenants to hand their keys back with the blessing of the landlord when the premises was no longer needed or failed to fit the business requirements going forward. So how do you conduct a commercial lease termination?

How to end a commercial lease early

 In practice, the best time to ensure you can terminate a commercial lease legally is before signing your commercial lease agreement.  Because while you may have a highly amenable landlord who is happy for you to surrender your lease without any penalty, relying on goodwill does not make solid business sense. 

 After all, it can be difficult to anticipate future commercial property requirements; the type, location, and size of premises you require today may be different to your needs tomorrow, perhaps due to a change in business strategy, or higher than expected demand for products.  In this article we will delve into the options available for how to end a commercial lease early without being hindered with demands for unpaid rent or damages due to breach of contract and loss of rental income.

05 March 2019
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Break clauses

Break clauses provide the optimal route to exiting your commercial lease, on one proviso – that you have a break clause in your tenancy agreement.  Break clauses are written into agreements to enable tenants to terminate a commercial lease prior to the contract end date. Before being able to trigger a break clause, tenants will typically need to fulfil a minimum rental period, for example 18 months.  In addition, a breach of covenant could lead the landlord to refuse to honour the terms of the clause.  This, however, is discouraged under the code for Leasing Business Premises in England and Wales 2007 (Lease Code 2007) which recommends that:

"The only pre-conditions to tenants exercising any break clauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases. Disputes about the state of the premises, or what has been left behind or removed, should be settled later (like with normal lease expiry)". 

As such, as long as there is a clearly drafted break clause contained in your tenancy agreement, and you meet the conditions surrounding the clause, you can conduct a commercial lease termination earlier than planned with no financial penalty. 

Agreeing to terminate a commercial lease 

If a break clause does not exist within your tenancy agreement, the next best approach is to speak to your landlord to see if they will agree to you ‘surrendering’ your commercial lease early without any ongoing liability or penalty.  Your chances of achieving this are considerably improved if you already have a sound business relationship with your landlord, and you have kept within the terms of your contract – i.e. in respect of payment of rent and upkeep of the premises.  In addition, external factors such as the market for commercial property in your area will also play a part.  

Your landlord is not obliged to agree to end a commercial lease early, in which case you may consider other options, including assigning the lease.

Finding a replacement tenant (Assignment)

Transfer of a commercial lease to another party can provide a valid way to end your tenancy early, however there will typically be restrictions defined within the contract, designed to ensure the landlord retains control over who is trading from their premises, and that the assignee will honour the lease commitments.  In addition, the landlord will need to give permission to permit the replacement tenant, but this cannot be ‘unreasonably withheld’.  The landlord may also be within their rights to require payment of a realistic sum in respect of legal or other costs incurred in connection with the provision of its consent. 

Authorised guarantee agreement

As an outgoing tenant assigning a lease, as a pre-condition, you may be asked to enter into an Authorised Guarantee Agreement (AGA), making you a guarantor.  Under such arrangements, the tenant is required to guarantee the performance, by the assignee, of the terms from which the tenant has been released.  This means that in the event of any failure of the assignee to fulfil the terms of the commercial lease, the landlord can pursue the outcoming tenant for damages.  The outgoing tenant is committed to the terms of the AGA until the assignee passes their interest to another party, or the lease comes to an end.  Therefore, if you are asked to enter into an AGA, consider requesting a time limitation on your commitment as a guarantor.  

And always remember, if you do enter into an AGA, it may be deemed invalid if the landlord seeks to impose any liability on you which goes beyond the terms of the original lease agreement.  In other words, just because you become a guarantor, this does not mean you are liable to any greater extent than you were as a tenant.

So, how do I end a commercial lease early?

To complete a commercial lease termination, it is only achievable if you understand your options.  For this reason, it is essential you seek specialist commercial property legal expertise from a landlord solicitor or tenant solicitor both when entering into a commercial lease, and when you first think you may need to terminate the agreement early.  Effective negotiation in these situations is essential, and to do so requires detailed acquaintance of commercial property law. 

Guillaumes LLP are specialist commercial property lawyers experienced in assisting businesses to begin and terminate commercial leases. If you’re having problems with a property, or any other business dispute, we can help. For more information, contact us today.