Tenant's guide to exiting a commercial lease

However, situations such as business expansion, financial strain or the need to relocate may require tenants to exit their lease early. While this can offer flexibility, it is a complex process that often involves negotiations and careful attention to the lease terms. Tenants must understand the steps involved to avoid costly mistakes and ensure a smooth exit.

Break rights

Break clauses give tenants (or, in some cases, landlords) the option to terminate a lease early, providing flexibility if circumstances change. These clauses are negotiated and included in the lease at the outset.

To exercise a break, tenants must typically provide written notice to the landlord, often six months before the intended break date, though this period may vary. Some leases specify breaks on fixed dates (e.g., every five years), while others may offer rolling breaks (e.g., every 12 months after an initial period).

For tenants, exercising a break right usually comes with conditions, such as paying rent up to the break date, returning the property in good condition with vacant possession and ensuring there are no repair breaches.

It is crucial for tenants to track the break date and notice period. Serving an invalid or late notice can forfeit the right to break, leaving the tenant liable for the full term of the lease. Seeking professional advice is essential to ensure the notice is properly served and all conditions are met, avoiding costly financial consequences.

Surrender

Surrendering a lease provides tenants with an alternative way to exit a commercial lease early, but unlike a break clause, it is not typically outlined in the lease. Instead, surrenders are negotiated arrangements between tenants and landlords to terminate leases by mutual consent. This option is often pursued when no break clause exists and both parties agree that ending the lease early is in their best interests.

A formal deed of surrender is usually required to document the agreement and release both parties from further obligations under the lease. The deed is crucial for the tenant, as it ensures a release of liability - without it, the tenant may remain responsible for future rent or repair obligations even after vacating the premises.

Surrenders offer tenants a quicker, more flexible exit than waiting for the lease to run its full term. However, it often involves negotiating financial terms, such as settling any outstanding rent or addressing dilapidations.

Assignment

In many commercial leases, tenants have the right to assign the lease to another party, transferring their obligations if they no longer wish to occupy the premises. However, assignments are usually subject to the landlord’s consent (which cannot be unreasonably withheld) and may also be subject to other conditions set out in the lease.

A common condition is the Authorised Guarantee Agreement (AGA). An AGA is a contractual agreement that ensures the original tenant remains liable to the landlord for the lease obligations if the assignee defaults during the remainder of the lease term. This means that if the new tenant fails to meet their obligations, the original tenant could be called upon to pay the rent or enter into a new lease of the property. The tenant should therefore assess the financial strength of the assignee before proceeding with the assignment.

In summary

Exiting a commercial lease involves several options, each of which depends on the lease terms and the negotiations between the tenant and landlord. Whether you are considering exercising a break clause, surrendering the lease or assigning it to another party, you should carefully review your lease and seek professional advice to fully understand your rights and obligations.

Exiting a lease requires careful planning, addressing dilapidations, settling outstanding payments and conducting a final inspection. Strict compliance with the lease terms is essential to avoid costly mistakes and ensure a smooth and efficient exit.

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For more information or advice, please contact Amy O'Connor in our Real Estate team.