How To Terminate A Commercial Lease Early
Nov 29 2019
If you take on a lease and then find that you no longer have the need for the premises due to expansion or contraction of your business, what are the options available to you to be able to get out of the leasing commitment? Generally speaking, there are four options that could be available to you if you want to terminate a lease early, which are:
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Most leases will contain a clause that allows the company that holds the lease to seek a new tenant to take over the lease. In order for the assignment to take place, various conditions need to be met, such as the financial strength of the new occupier. In addition, it is likely that you will need to sign an Authorised Guarantee Agreement (AGA) which is a guarantee that usually applies to leases granted since 1996. This is usually imposed as a condition of a landlord giving consent to the assignment of your lease.
This does not mean that your potential liabilities in relation to the lease will come to an end. It is worth noting that the landlord has the right to call on you to fulfil the obligations of the lease in the event that the person or company that you assigned your lease to defaults on their obligations.
This is a one-off guarantee and once the assignor that passed the lease on to someone else, your obligations under the AGA will usually fall away. If the assignee stays in the property and does not re-assign, then you will be liable until the lease expires.
If you find yourself in a position of having to dispose of your property where the rent you are paying is substantially above the market rent, a lease assignment may not be possible. In these circumstances, you may be able to sublet the property at the prevailing market rate.
This will leave you, as the tenant, having to pay the difference between the rent that you pay to the landlord and the rent that you accept from your subtenant.
In simple terms, your landlord continues to invoice you for the full rent under the lease and you invoice your tenant for whatever figure has been agreed and will have to cover the difference.
In a buoyant commercial property market, it is also possible to sublet your property for a profit rent in circumstances where the rent you are paying is below market levels.
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There are times when a landlord might be willing to terminate a lease early and allow the tenants to walk away from their commitments. This can be for many reasons, the most common being because:
- The landlord wants to redevelop the building,
- The landlord feels that they can re-let the property for a higher rent,
- The tenant has not been a good tenant.
Despite this, the landlord will often try to obtain a cash payment from the tenant to allow them to terminate their lease early.
Tenants should bear in mind that, depending on the location of the property and market conditions, this can often be a cheaper way to terminate their lease and within a faster timescale than they would otherwise be able to.
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A break clause is a provision in a lease which allows either the landlord or the tenant (or both) to end a commercial lease early. It will usually occur on a specified date which is outlined in your lease and allows either party to end the lease as long as the conditions of the break clause have been met. Although it seems fairly straight forward, it can often be the exact opposite…
Most break clauses will specify the precise form which a break notice must take and may impose specific requirements on the tenant regarding how and where to serve the break notice and whether there are financial penalties attached to the break clause.
There will usually be pre-conditions attached to a break clause which can include clauses that require the tenant to serve minimum notice periods, paid all of the rents or other payments due under the lease. This does not only refer to rent can also include any service charges and insurance premiums that need to be paid.
Here at Savoy Stewart, we are experts in rent reviews and lease renewals. Feel free to get in touch with the Savoy Stewart team today to discuss any queries and/or problems you may have regarding commercial leases.
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