What you need to be aware of
By entering into a commercial lease, it is usually the case that you have agreed to continue this tenancy for a specific period of time and this is usually considered to be a fixed term. However, there are many reasons you may wish to end this lease before this time period is up, e.g. the premises are no longer suitable for the needs of your business or you’re struggling financially and need to downsize.
However, ending a legally binding contract early is no easy feat, no matter the circumstances in which it is required. Once you’ve signed on the dotted line, you have contractually agreed to occupy this space for the agreed amount of time, as well as make the necessary payments within this timescale too. So is it ever possible to end this agreement without penalty? If a quiet word with your landlord doesn’t cut it, then there are still some options you can consider.
Break clause in the lease
Your lease may include a ‘break clause’, which allows both the landlord and the tenant some leeway to end a lease after a given period of time. This enables the tenancy to be terminated without anyone facing a penalty. Typically as a tenant, a notice period of two months is required to let your landlord know in writing that you are using the break clause.
Be sure to thoroughly read through your contract to determine whether or not a break clause is included and then abide by the terms and conditions outlined to ensure that you won’t be penalised.
If you fail to comply with the conditions set out in the contract, then you risk jeopardising your right to use the break clause and this could result in penalties, along with the requirement that you continue with the tenancy.
Negotiating early exit and surrendering your lease
You may be able to negotiate with your landlord on a one-to-one level, to allow them to consider your circumstances and determine whether they would agree with the termination of your tenancy.
It’s unlikely that simply by asking to end your agreement early that your landlord will simply comply with no penalty. For that reason, it can be advisable to consider what you can bring to the negotiation. For example, if you are downsizing, then your existing landlord might already have a suitable space. Offering to stay with that landlord may work in your favour.
In the event that your landlord doesn’t wish to comply with your request to end the lease early, then you may have to go down the formal surrender route.
Surrendering your lease can be very costly, and there is a strict criteria in which both your business and the landlord of the premises must have met in order for the surrender to be viable. A common misconception is that you are able to simply hand your keys back to the landlord and cease to occupy the premises.
This is certainly not the case and in fact both parties must act in a way which is inconsistent with the lease continuing and agree upon the surrender. For example, you could vacate the premises and the landlord could grant a new lease to a new tenant. If this applies, the lease will then be surrendered by ‘operation of law’.
Surrendering without a formal deed (i.e negotiating with your landlord) is naturally, a much quicker and less costly process. But it is worth bearing in mind the legal complications that could potentially occur as a result. It is important if you are ending your lease in this manner that you seek professional legal advice to ensure you comply with all obligations throughout the process.
Securing a new tenant
You are entitled to source a new tenant for the premises to take over your tenancy if you wish to leave. This enables you to vacate the premises and terminate the contract without penalty, as the landlord won’t incur any inconvenience or losses as a result. Note that there may be further legal obligations to comply with when proceeding with this and you should involve your landlord throughout the process.
Also bear in mind that you will be responsible for marketing the premises to potential tenants, the tenant may still need to pay a deposit and may also be required to start a completely new lease as opposed to taking over your current one. You must be completely transparent throughout with both the landlord and the new tenants. If you wish to carry out the termination of your lease in this way, it may be worth seeking professional advice to ensure you don’t compromise your contract.
If your contract includes a subletting clause, you may be entitled to bring in a new tenant without ending your lease at all. Remember that if you do this, you will become the new tenant’s landlord and have to meet all their requirements, while still having to abide by the clauses outlined by your landlord.
Forfeit by a landlord
Your landlord is able to end the tenancy if you break any of the clauses written in your lease agreement, such as falling behind with payments or causing significant damage to the property. The landlord is then entitled to change the locks at the premises, known as peaceful reentry, if the premises in question is commercial.
The landlord can also go down the court route, if they feel it is appropriate, however this will take some time to come to fruition. If you’re struggling financially and are at risk of losing your premises, you may wish to seek advice.
Fixed-term tenancy and ending the lease
If your tenancy is a fixed-term tenancy, this means that the agreement automatically comes to an end when the term is up. It may be an unlikely event that the term of your tenancy ends at the same time that you wish to terminate your lease, but in the case that this does happen, you are able to walk away without any risk of penalty.
You may be required to undergo inspections in order to determine whether deposits will be returned and you may need to sign further documents to contractually terminate the tenancy.
Costs involved in ending a lease early
If you need to end a lease early due to closing down your business, then this is an extra expense at a time that already requires you to make substantial payouts, so it’s worth noting the costs involved with terminating the lease early to ensure you can do so correctly, while abiding by any legal obligations.
Not only will you need to pay for the lease termination itself, but you will also need to pay for professional advice to ensure the termination is completed legally. You may need to instruct a solicitor and a conveyancer, and it may take some time to negotiate a deal. This means the longer it takes to come to an agreement with your landlord, the more costly the process will be.
If you’re in a difficult financial situation, then you may be able to demonstrate that your company is incapable of meeting payments in the long-term, and in this case your landlord may agree that it is in their interest to end the lease. In order to pitch this successfully to your landlord, you may find that professional advice will support your argument.
Alternatively if you simply cannot afford to pay the lease any longer and the company as a whole is struggling financially, it may be time to consider the formal insolvency route for the business with a view to a complete shut down, or as a rescue process to start again fresh. You should however beware of personal guarantees on the lease when considering this route.
If you’re struggling to keep up with payments and need a way out, come and talk to us. We can help you to find the right solution for your business.