How to surrender a commercial lease: a guide for landlords and tenants

Commercial landlords and tenants are both vulnerable during times of economic uncertainty. Tenants may struggle to pay rent and meet their lease obligations, while landlords may experience difficulties ensuring they continue receiving income. 

If tenants want to escape their commercial lease obligations, they can either look for a new tenant to whom the lease can be transferred or attempt to negotiate a surrender with the landlord.

A landlord is not obligated to accept a lease surrender, and landlords will often only do so if there is an obvious benefit in getting possession of the premises back early. This might be because they want to occupy the property themselves, redevelop it, or have another tenant ready to move in on improved terms.

Whenever possible, landlords will want to ensure that there is no interruption in income and that all other liabilities will be paid. 

For this reason, as opposed to surrendering, tenants are more likely to obtain their landlord's consent to the lease's assignment or the property's subletting to a third party with a solid financial record. Even if this is the case, the landlord may still want the outgoing tenant to provide a guarantee on assignment. If the tenant sublets, they will continue to be accountable for the rent and other obligations outlined in the lease.

When seeking permission to assign or sublet, lease clauses and statutory rules often require landlords to act reasonably. It is advisable to seek specialist legal advice when making such an application.

While a tenant may not be able to afford to stay on the property, there is no explicit obligation on the landlord to act reasonably when it comes to surrendering the lease.

Is there a break clause in the lease?

One thing to check before surrendering is to see if there is a break option in the lease. Not all commercial leases include a break clause, but if there is one, serving a break notice must be done carefully. What might look like a small error may invalidate the notice.

Surrender of the lease

A commercial lease is surrendered when the landlord accepts the transfer of the tenant's interest and both parties agree to terminate the lease. This can be done formally, by deed, but this is only sometimes necessary. 

If the landlord and tenant agree on the surrender and act in a manner that is inconsistent with the continuation of the lease, the surrender will occur automatically by 'operation of law'.

An express written declaration by both parties is the most typical method of surrendering a lease. If the original lease was created through a deed, which is the case for three years or longer terms, the surrender document must also be executed as a deed.

All current landlords and tenants to the lease will need to join in the surrender, and the position of any mortgagee needs to be carefully examined as it may be a breach of mortgage conditions if their consent is not obtained. A mortgage on a registered lease must be cleared before a lease surrender can occur.

The date of the surrender deed marks the end of the lease. In many cases, parties agree to surrender the lease on a future date to allow time for the tenant to sell the stock, make necessary repairs, and prepare for the exit, with the assurance that the landlord has accepted and committed to acceptable terms. This option is particularly beneficial to tenants.

Similar to a surrender deed, an agreement for lease may outline additional terms landlords impose on tenants due to being released from their lease obligations. These terms could include a premium or clauses that address liabilities for past breaches.

If the landlord and tenant behave in a manner that conflicts with the continuation of a tenancy, the lease could be deemed to have ended. This process is commonly referred to as a surrender by operation of law. 

To show that a tenant has surrendered the property early, the tenant and landlord's conduct must indicate that the property has been returned. This often involves the tenant returning the keys and or their part of the original lease documentation, and the landlord accepting the surrender. The tenant simply vacating the property and returning the keys is insufficient to prove surrender.

Acceptance of the keys by the landlord, without any objections, is one way to indicate their agreement with the surrender. Alternatively, the landlord's behaviour could indicate their tacit agreement, such as taking control of the property in a manner that is inconsistent with the lease continuing.

There have been instances where a landlord's conduct, such as permitting another tenant or themselves to occupy the property for a brief period or accepting rent from an undertenant directly, has been considered as their consent.

Courts have ruled that there was no surrender in cases where a landlord changed locks to secure the property against intruders while still claiming rent, or allowed a third party to occupy the property while negotiating terms for a new lease. It is worth noting that the law is intricate, and each case is assessed on its own unique set of facts.

The effects of a surrender

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

Before accepting any surrender of a lease, landlords should thoroughly examine the terms of any underleases. If the underlease specifies that the same rent is payable as under the head lease, the landlord must verify that the rents are still owed after the head lease has been surrendered.

The outgoing tenant and their guarantor, if applicable, are accountable for any lease term violations, including dilapidations, up until the surrender date. Typically 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 regarding any breaches.

Can a landlord protect their property? 

In Padwick Properties Ltd v Punj Lloyds Ltd [2016], the court ruled over whether a lease had been surrendered by operation of law when the tenant vacated the premises and returned the keys. The landlord replaced several locks, added extra security measures to deter trespassers, and initiated marketing for the property.

The tenant's guarantor, attempting to evade responsibility for rent arrears, contended that the landlord's conduct indicated a definite acceptance of the surrender of the lease. The court disagreed, ruling that it was perfectly reasonable for the landlord to conduct marketing and ensure the property was secure, and these actions did not mean they accepted a surrender.

Accepting the surrender

If the landlord accepts a surrender, the tenant will no longer be obligated to pay rent or fulfill lease covenants moving forward. However, the tenant remains accountable for unpaid rent and any prior breaches of the lease.

The landlord may have the option to seek unpaid rent and other breaches from the tenant's guarantor. However, this is also a complicated matter where the landlord should seek professional legal guidance.

Landlords should exercise caution and conduct due diligence before accepting a surrender to prevent unforeseen liabilities. For example, any underlease created by the tenant will remain in place, so the landlord will not get vacant possession and will be liable for their obligations in the underlease.

Things to consider when terminating leases

Unless the landlord is carrying out a major refurbishment or has found a new tenant to take on the works, he will look to the tenant to put the property in repair at the end of the term. This is referred to as a dilapidations claim. The landlord may also require the tenant to carry out reinstatement works regarding any alterations carried out during occupation. This may be particularly important for tenants in the life sciences sector, which can have very bespoke requirements.

Generally, a tenant is required to carry out the works necessary to put the premises back into the standard of repair envisaged by the lease. This would involve the tenant carrying out works of repair during the last few months of the lease term, which in most cases will interfere with their business. After the term has expired, the tenant will have no rights of occupation to carry out repair works (unless granted licence to do so by the landlord).

However, many tenants prefer to refrain from carrying out the works themselves. If the tenant chooses not to do the works or does not do all the works that the landlord considers outstanding, the landlord will usually claim the costs as damages, together with loss of rent for the period it takes to carry out the required works.

Quite often, a landlord and its tenant will reach a financial agreement over the dilapidations claim so that the tenant does not have to carry out the works. As before, early preparation is essential so the tenant can put themselves in a strong negotiating position. 

Advice should be sought from a solicitor and a building surveyor some 12 to 24 months before the expiry of the lease so that there is plenty of time to do the works if this is the best option for the tenant.

Contact our commercial lease solicitors

It is important to seek legal advice before considering a lease surrender to ensure that the necessary requirements are met and to identify the best course of action.

Our team of commercial property solicitors has expertise in assisting both landlords and tenants with lease surrender matters.

With offices in Brighton, Eastbourne, Hastings, London, Uckfield, and Ulverston, we provide our services to clients both locally and nationwide.