How to get out of a commercial lease early

A commercial lease is a binding legal contract, but there are times when businesses may wish, for a number of reasons, to leave the premises. If this is the case with your business, how can you get out of a commercial lease early?

What is a commercial lease?

A commercial lease is a form of contract agreed between a business tenant and the building’s landlord. It gives the business the right to use the property for its business activity for a set period of time, as stipulated in the terms of the lease. It also details the rights and responsibilities of both the business tenant and the landlord during that time.

But what if you wish to end the commercial lease early? You may want to move to larger premises, you may wish to downsize, perhaps you are closing your business, or transferring it to a new owner.

There are a number of ways you may be able to get out of a commercial lease early.

A break clause

If your contract has a break clause – for example at five years, during a ten year lease – you can tell the landlord that you are going. However, be aware that there will be a notice period. If your break clause comes into effect on January 31, and you have to give not less than six months’ notice, then you will need to have alerted the landlord by July 30.

There may also be other conditions, for example the landlord would expect to take vacant possession , so not just the people but all the contents (equipment, furniture etc) must be removed.

Fail to comply with the break clause conditions, and you may miss the opportunity to move out. As Abba once sang, breaking up is never easy to do…..

Assignment

Under the alienation provisions, you may be able to transfer the remainder of the interest you have in a lease to another party. A common example of assignment is when a business is set up in a person’s own name, as a sole trader, then they decide to incorporate. Here, the lease would need to transferred or ‘ assigned’ to  the new entity .

Assignment is also a way of getting out of a commercial lease, by assigning the lease to another tenant. The landlord will need to agree this, and there may be conditions attached.

Following a reform in the law in 1995, an authorised guarantee agreement is likely to apply. This means that for the duration of the remainder of the lease, while the new tenant is in occupation, if something goes awry (for example, if the rent is unpaid), the landlord can pursue the original tenant for breaches by the new tenant.

Underlet

An alternative to assignment is underletting the lease, which also falls under the alienation provisions. Here, you would still be responsible for the lease, and the rents and associated costs, but you would have found a tenant who then reimburses you, hopefully by the same amount. You are still on the hook as regards the terms of the lease, but it does mean your costs (rates, rent etc) are covered.

Surrender

In the absence of a break clause, or any other options, you may be able to negotiate an end to the commercial lease, if the landlord is in agreement. However, you would generally be expected to pay compensation to the landlord.

Our advice as commercial property lawyers is always to give careful consideration to the terms of a lease, to anticipate the future needs of your business, and only then sign a contract that suits both you and the landlord.

For help and advice on commercial property leases, please get in touch with Iain Mason, Head of Legal at Optimum Professional Services. Email [email protected].