While nowadays, commercial property leases tend to be shorter and more flexible than in the past, situations still arise whereby either the tenant or the landlord wishes to exit the lease early. And while a commercial lease agreement is a legal contract, there are several ways a business can exit earlier than agreed – from break clauses, assignment and subletting.
So, if this is something you’re considering, and want to find out more about how to go about this, or even how expensive it could be for your business – you’ve come to the right place.
Reasons to exit a lease early
There are several different reasons businesses exit their leases early – such as outgrowing their existing premises, or even needing to downsize due to a change in business performance. In other instances, the cost of a rental could become untenable for a business, especially if they are adjusting to higher costs of maintaining the office space – such as increased energy bills.
Some businesses consider exiting a lease early when they receive an offer from another business wanting to sublet the space. This can happen regularly for desirable properties and can be helpful for businesses already considering an early exit, though it is not always allowed within the terms of the lease.
If a business becomes unhappy with the terms of their lease (or if they feel the landlord is not upholding their side of the terms) they may consider exiting early. Wanting to physically relocate your business could be another factor pushing you towards exiting your current commercial lease agreement.
What happens if you break a lease early?
If there is no break clause in your tenancy agreement, ending your tenancy early could have considerable consequences for your business. Simply walking away from your tenancy can mean you incur substantial surrender fees (if the landlord agrees to the surrender) as well as professional fees from surveyors and solicitors. Because of this, leaving a lease early could end up costing your business more than just staying and fulfilling your original agreement.
There is often room to negotiate these terms with your landlord to ensure no ongoing liability – though this is often dependent on factors such as the state of the property market and the quality of the fit-out that you have undertaken.
What are the options for getting out of a commercial lease early?
So, how can you exit a lease early? Well, there are several different ways you can go about doing this – many of which are dependent on the specific terms within your contract. One option is to negotiate terminating/surrendering the lease with your landlord – to see if there’s room to reduce the cost of exiting (but more on this later).
Another option is to invoke the break clause in your contract (if there is one) though this is dependent on whether the timing of the termination permits it.
If neither of the above are options available to you, some businesses consider assigning a lease to another business – to take on the obligations of the commercial lease – or sublet the office space, in which both the new tenant, and the original tenant, will still be responsible for meeting the terms of the lease. Both assigning a lease and subletting a space require the consent of your landlord.
Should I seek legal advice?
In most cases, it is sensible to seek advice from a surveyor when deciding whether to exit a lease early, or stick it out. It will be a lot more cost effective in the long run to receive advice, as this can put your business in a much stronger position when it comes to negotiating your lease – rather than being forced to pay high penalties of leaving early, for example.
It’s important to remember however, that when it comes to negotiation with a landlord, you may be liable for the landlord’s legal fees as well as your own – so factor this into the financial cost of your decision.
Negotiating an early lease exit
In some cases, it may be possible to surrender the lease (to reach an agreement with your landlord) through negotiation. If you feel your landlord has broken any terms of the lease – such as an obligation to maintain or clean the property – this can help strengthen your position during the negotiation.
Similarly, if your business is struggling, it may be in the landlord’s best interest to allow you to exit the lease earlier than intended, to avoid the risk of unmade payments, and give them time to find a more stable tenant.
The conditions of the commercial property market can also affect the strength of your negotiations. For example, if there is plenty of demand for office spaces, meaning your landlord wouldn’t struggle to find another tenant – and may even be able to charge more with a new lease – they would likely be more open to negotiating an early exit. Conversely, in a weak market, the landlord will likely want to retain your lease for as long as possible, and therefore be less open to negotiations.
Nowadays, leases have become increasingly shorter and more favourable to tenants than they have in the past – so it’s definitely worth instructing a surveyor to negotiate your lease surrender if you want an early exit.
Avoiding disputes
While it’s not always possible to avoid disputes, there are a few things you can do to try and minimise the likelihood of them happening. The biggest one being to make sure both parties are clear on the terms agreed in your lease from the outset, to avoid confusion or back and forths when decisions like these do arise.
When it comes to negotiating, trying to meet somewhere in the middle with your landlord, will likely help save you both money in legal fees. See if your landlord would consider subletting or assigning the lease to another business, which could benefit both parties.
Legal fees can be expensive, so anything you can do within reason to reduce the likelihood of a long drawn out dispute will be beneficial for your business.
Consider the cost of an early exit
In most cases, there will be additional fees you have to pay to your landlord in order to be able to exit your lease earlier than agreed. This is typically a negotiable amount and tends to include costs such as the marketing period of the space, the cost of dilapidations, and professional fees from legal advisors and surveyors. Remember, you will most likely be required to pay your landlord’s legal fees as well as your own.
While assigning a lease to another tenant can be a good way for some businesses to get out of their leases early, they also come with their own set of costs. You will have to offer a market-level incentive (rent-free) to ensure you remain competitive in the market as well as cover the landlord’s legal costs during the landlord consent process.
A forfeiture of lease can be drawn upon if a tenant breaches the terms of their lease. Depending on the terms and nature of this breach, the landlord can serve a Section 146 notice, which puts the tenant’s lease at risk of being terminated. However, it is not recommended to use this as a ‘way out’ of a lease.
Lease break clauses
A break clause is a clause within a lease that allows the tenant to end the lease early, usually by a set date or agreed time period. Break clauses are in most tenancy contracts though they still typically involve payments/fees – such as the cost of cleaning, removing alterations and making repairs.
It’s worth knowing the timings of your break clauses, as they can typically be invoked at particular milestones. For example, many 3-year leases typically have a break clause at the end of the first or second year, while a longer 10-year lease may have a break clause of five years. Generally speaking, shorter leases tend to be easier to get out of – as there is less of a financial burden for the landlord.
However some landlords impose terms that are almost impossible to break out of, so it’s important to understand what you are agreeing to before you sign on the dotted line, and seek legal advice if this is something you feel you’d benefit from.
Assigning a lease
Another way of exiting a lease early, especially if there is no break clause in your tenancy agreement, is to assign the lease to a new tenant. In a commercial lease assignment, finding a new tenant will be the responsibility of the current tenant, rather than the landlord – though the landlord is likely to check their credit, references, and the way they plan to use and alter the space.
If you do find a new tenant, the landlord is under a legal obligation to allow the assignment, as long as certain boxes are ticked.
Some very short leases may prohibit assignment within their terms – as it’s not worth assigning a lease for a short duration of time. For this reason, they tend to be more suited towards leases that still have multiple years left.
Does assigning a lease require a personal guarantee?
In most cases, yes – assigning a lease normally requires a guarantee. It is standard in UK leases that you remain on as a guarantor by way of an AGA (authorised guarantee agreement). This means that you must consider your relationship with the new tenant carefully, as if they fail to fulfil their obligations as the tenant – such as paying outstanding payments or covering the cost of repairs – you will become liable for this.
Because of the level of risk associated with startup businesses, landlords are more likely to require a guarantee to be in place for a commercial lease assignment. More established, stable businesses likely have greater ‘covenant strength’ and therefore may not always require a personal guarantee to take over a lease – though again, this is dependent on the decision of the landlord.
Subletting a commercial lease
Depending on the terms of your commercial lease agreement, you may also have the option of subletting, or ‘underleasing’ your property. In simple terms, this refers to the act of a tenant renting out a property (or part of a property) to a subtenant that they themselves are renting.
Similarly, the landlord can typically not legally deny consent for this happening as long as you meet certain criteria in the sublease. The main criteria that needs to be met is to achieve rent that is the same or more than you yourself are paying. Where exiting a lease early is not always possible, subletting can be a good option for businesses, allowing them to cover the rental payments of the property without having to occupy it themselves.
However, there are costs associated with subleasing a commercial property, such as the cost of marketing the space, agency fees, legal fees and any rental incentive that you need to provide. As the ‘head lease’ you will take on the greater responsibility of managing the premises, so it may also take a commitment in terms of time.
Summary
There are many different reasons businesses may want to exit their lease earlier than planned – though whether they should do so or not, depends on the terms of the lease, the strength of their negotiation and the costs attached to an early exit.
Remember, if your lease does not have a break clause, or the timings do not align, instruct a surveyor to review your lease to see if assigning or subletting the lease are viable options for your business.
If you need further help in exiting your current lease early – from working out if it’s the right decision for your business, to help dispose of your old office space – our team of expert agents are happy to help you through the whole process. So, get in touch today!
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