How to surrender a commercial lease

There is no obligation on a landlord to accept a surrender of a commercial lease and landlords will often only do so if there is a benefit in getting possession of the property back early. This might be because they intend to occupy for themselves, redevelop or as they have another, possibly better, tenant ready to move in on improved terms. Alternatively, the landlord may require a premium to be paid by the tenant in return for which the landlord will agree a surrender. In some instances where a landlord is keen to obtain possession (e.g for redevelopment a landlord may be prepared to pay a premium to the tenant).

Surrender or assignment of commercial lease?

Landlords will want to ensure, as much as possible, that there is no interruption in rental income and that all other liabilities such as business rates will be paid. For this reason, as opposed to a surrender, tenants are more likely to obtain consent from their landlord to the assignment of the lease or to the subletting of the property to a third party that has a good financial track record. Even then the landlord may still want the outgoing tenant to provide a guarantee on assignment and if subletting, the tenant will in any event remain responsible for the rent and other liabilities in the lease. There are often lease clauses and statutory rules that may oblige a landlord to act reasonably when considering a request for consent to assign or sub-let and legal advice should be sought when making such an application. There is no obligation on a landlord to act reasonably with regard to a proposal by a tenant that the lease should be surrendered even if it is obviously the case that the tenant cannot afford to remain in occupation.

Is there a break option in the lease?

One thing to check before resorting to a surrender is to see if there is a right to determine the lease early contained in the lease itself, commonly referred to as a break option. Not all leases include a right to break during the term, but if there is one then serving a break notice has to be done carefully. What could look like a small error may end up invalidating the notice. Our Property Litigation team serves these notices regularly and for a competitive fixed fee particularly when compared to the financial consequences of a tenant doing the notice and getting it wrong.

Two options to surrender a commercial lease

1. Express surrender in writing

The most common form of surrender is by an express written declaration by the parties that they are surrendering the lease. If the original lease was one that had to be made by a deed (as is the case when granted for a term of 3 years or more) then the surrender document should also be by way of deed.

All current landlord and tenants to the lease will need to join in the surrender and the position of any mortgagee needs to be carefully checked as it may be a breach of mortgage conditions if consent is not obtained to the surrender. A mortgage on a registered lease has to be cleared before a surrender can take place.

The Lease will come to an end on the date of the surrender deed. Often Agreements to Surrender are entered into in order to fix a date in the future when the parties are to complete a deed of surrender. This is better for a tenant who wants to allow time before exiting to sell stock and carry out repairs ahead of the surrender date knowing that the landlord has agreed and is bound by acceptable terms. As with a surrender deed an agreement for lease may set out other terms, often those that the landlords impose as a result of releasing the tenant early from its lease obligations such as a premium or clauses dealing with issues such as liabilities for past breaches.

2. Implied surrender by conduct

When the conduct of the landlord and tenant is inconsistent with the continuation of a tenancy the lease may be considered to be at an end. This process is commonly referred to as a surrender by operation of law. The conduct must show both the tenant handing back the property, usually symbolised by the handing over of the keys and/or their part of the original lease documentation, and the landlord accepting the early surrender. It is not enough for the tenant to simply send back the keys and vacate the property. The landlord must be seen to have by its conduct demonstrated acceptance of them. This might be by indicating expressly acceptance of the keys without dispute or it might be a tacit agreement evidenced by the landlord going in to the property and taking control of it in a way which is inconsistent with the lease continuing.

It has previously been found that a landlord has given consent by conduct when they have allowed another tenant or themselves to go into occupation of the property for a few weeks or accepting rent directly from an undertenant.

Where a landlord changed the locks to secure a property against intruders whilst also claiming rent and in another where a Landlord allowed a third party to occupy a property whilst negotiating the terms of a new lease, courts have ruled that there was no surrender. The law though is complex and each case turns on its own facts.

The effects of a surrender

Once the lease is surrendered all of the Tenants liabilities to pay future rent or to continue to comply with the terms of the lease come to an end. The rights of any undertenants who have the benefit of security under the Landlord and Tenant Act 1954 will survive even if the underlease was granted in breach of the lease terms and the undertenant will become the immediate tenant of the landlord, paying rent and performing the covenants as set out in the underlease.

Landlords will want to investigate carefully the terms of the underleases before accepting any surrender of a commercial lease, for example if the underlease states that the same rent is to be paid as under the head lease, the landlord must make sure that the rents are still due after the head lease is surrendered.

The outgoing tenant and their guarantor if applicable remain liable for any breaches of lease terms up to the date of surrender, including dilapidations. Commonly the surrender deed includes provisions for a payment to be made at the date of surrender in exchange for being released from any liability or a clause expressly preserving parties rights in respect of any breaches.

For more information about any particular case or situation you are involved in, please contact a member of our Property Litigation team. They are undertaking no obligation new enquiries over the phone or via video call throughout the week. The best way to get hold of them is by calling the main office line on 02380 482482 or email: propertylitigation@parissmith.co.uk.