After having leased a commercial property for a period of time, you may find that the premises are no longer suited to your needs. Perhaps you need additional space to accommodate growth or you are finding your current lease rent too high and are thinking of moving to an area where the rents are lower. Whatever your circumstances, how do you exit your lease before the term has expired?
Unless you are fortunate enough to have a break clause written into your lease which enables you to terminate the lease early the only way to terminate the lease will be forfeiture, merger, surrender or disclaimer. In addition, you may be permitted to assign or sub-let your premises.
In this blog we look at the basic aspects of forfeiture, surrender and alienation and comment on other lease obligations.
Forfeiture -You could “breach” the lease e.g. sit tight and stop paying rent or breach covenants to force the landlord to forfeit the lease. If you stop paying rent you should be mindful that you are likely to incur interest on the rent at a rate set out in the lease. You will also likely to be responsible, on an indemnity basis, for all the landlord’s costs relating to forfeiture and recovery of sums due. Commercially this may not help you in the long run. It is a risky strategy and the landlord will claim against you for forfeiture and against any guarantors personally. In addition, if a personal guarantee has been given the Landlord is likely to be able to force the guarantors to take over the lease.
Surrender – this will require the consent of the landlord and he is likely to want a premium for this as he will be missing out on rent until the end of the term. The outcome of the commercial negotiation will really depend upon your bargaining power as opposed to the landlord’s. If you have no power under the lease to assign or sub-let the premises (alienation) the landlord could be in quite a strong position here.
Alienation – If you have the power of alienation in your lease then you should consider whether assigning the lease to a new tenant or even sub-letting the premises is an option. This “new” tenant will pay the rent allowing you to move to cheaper premises. However, always be mindful that if the new tenant is in default of the lease you will be back at square one.
Repair and other obligations – By opening discussions with the landlord you are obviously putting him on notice of your intentions and he may take the opportunity to inspect and issue a notice of repair or a notice of breach of covenant which could lead to further expense. You need to be sure therefore that there are no breaches of the lease. You should also consider what your repair obligations are under the lease, particularly if the lease is to come to an end by surrender. It is likely that you will receive a schedule of dilapidations from the landlord and the cost of putting the premises into the state of repair required by the lease may outweigh any benefits of a lower rent elsewhere in the short term.
Owing to the number of legal issues involved in commercial leases it is always advisable to seek professional advice to avoid potentially heavy financial penalties. Before you enter a lease it is also vital that you ensure it is drafted to meet the requirements of both you and your business now and in the future. Preparing for an early exit may seem unlikely when you are starting out, but it could end up saving you a lot of money. To see how we can help to safeguard your business or to discuss commercial property matters, please get in touch with Helen Robinson at firstname.lastname@example.org