Sometimes landlords or tenants (or sometimes both) want to terminate a commercial lease early. Here Maunder Taylor, who provide property lease negotiations advice for customers in and around London, identify the steps which need to be taken for a legally-recognised lease surrender.

Why Surrender a Commercial Lease Early?

Sometimes tenants may find it difficult to meet their financial obligations under the terms of the lease – that is, they may not be able to pay the previously agreed figure. In other cases, investors or landlords may wish to improve the value of their asset, either by getting a new tenant in place, or by developing or refurbishing the property. This usually requires the existing tenant to move out – but should also mean that the owner can charge more in future.

The Importance of Break Clauses

The first thing to do is check the terms of the existing lease. Many of these have so-called ‘break clauses’ which allow the early termination of the lease, usually at a fixed point such as 18 months into a five-year contract. If there is such a clause, it should not be necessary to surrender the lease – but make sure you follow all the provisions in the break clause (such as when and where it is served) otherwise it could easily be invalidated.

If there isn’t a break clause written into the existing contract, then the lease can be surrendered in one of two ways outlined below.

Surrendering it in Writing

Surrendering a commercial lease in writing is the commonest way of surrendering a lease. This has to be confirmed in a written declaration by the parties involved (that is, the current landlord and tenant). If the original lease had to be made by a deed (which applies to all those granted for three years or more), then the surrender document should also take that form.

If there is a mortgage involved, then the position of any mortgagee needs to be carefully checked as it may be a breach of the loan conditions if consent is not obtained to the surrender. A mortgage on a registered lease has to be cleared before a surrender can take place.

The lease comes to an end on the date of the surrender deed. Sometimes this can take the form of an Agreement to Surrender, which sets a date sometime in the future for final completion. In the case of some commercial premises, this gives the tenant time to sell any existing stock before moving out, or to carry out repairs. An Agreement to Surrender can also release the tenant from other obligations, such as any penalties imposed for previous breaches of the lease.

Surrendering it by Implied Conduct

Sometimes it isn’t necessary to confirm the surrender with a written document. When the behaviour of the landlord and tenant is inconsistent with the continuation of a tenancy, the lease may be considered to be at an end as well. This process is commonly referred to as a surrender by operation of law.

The conduct must show both the tenant handing back the property, usually in the form of a symbolic handover of the keys, and/or their part of the original lease documentation. It is not enough for the tenant to simply send back the keys and vacate the property. The landlord must be seen to have – by its own conduct – demonstrated acceptance of them. This might be by indicating expressly acceptance of the keys without dispute or it might be a tacit agreement evidenced by the landlord going into the property and taking control of it in a way which is inconsistent with the lease continuing.

It has previously been found that a landlord has given consent by conduct when they have allowed another tenant or themselves to occupy the property for a few weeks or by accepting rent directly from an undertenant (who is renting from the tenant).It’s not completely cut and dry, however; courts have ruled that landlords who allow third party occupation while renegotiating lease terms, or who change the locks for security reasons while continuing to claim rent, haven’t surrendered the lease by implied conduct. Each case is different and needs to be considered on its own merits.

What Happens Next?

Once the lease has been surrendered, all the tenant’s liabilities – whether that is to pay future rent or to continue to comply with any of the other terms of the lease – come to an end.

It is worth noting that the rights of any undertenants who have the benefit of security under the Landlord and Tenant Act 1954 will survive, even if the underlease was granted in breach of the lease terms and the undertenant becomes the immediate tenant of the landlord, paying rent and performing the covenants as set out in the underlease.

The outgoing tenant and their guarantor if applicable remain liable for any breaches of lease terms up to the date of surrender, including dilapidations and any unpaid rent.

Property Lease Negotiations Advice in London from Maunder Taylor

At Maunder Taylor, we offer advice on all aspects of lease negotiation and renewal. We negotiate lease surrenders, renegotiate existing leases, supervise development and refurbishment works, give our opinion on any break clauses, and pursue changes of use to maximise the earning potential of any commercial premises.

We have acted for both landlords and tenants, and we always look to foster a good relationship between all parties as this helps to avoid any lengthy disputes, which can be costly – particularly if they end up going to a court, hearing or tribunal.

If you would like to know more about our commercial property management services, follow this link; you can also call us on either 020 8446 0011 or 01707 665 666 (the second number is for our residential block management clients in Hertfordshire and London).