How can a commercial lease come to an end?

There are various ways a commercial lease may come to an end. In this article, we consider:

  • Methods of termination and key risks and issues for a tenant.
  • The actions tenants may need to take at the end of the lease; however it comes to an end.

Methods of termination

The simplest way that a lease may terminate is for it to end on the expiry date set out in the lease. This is the date until which the parties originally envisaged the lease continuing.

The security of tenure provisions in the Landlord and Tenant Act 1954 (“the 1954 Act”) gives the tenant of a business premises an automatic right to renew their lease and remain in occupation after the expiry of the contractual term until the lease is ended in accordance with the notice procedures in the 1954 Act.

If the lease is excluded from the security of tenure provisions in the 1954 Act then, subject to the tenant’s intentions following the end of their tenancy and any specific terms of the tenancy itself, no formal documentation is required to confirm the lease has ended. Notwithstanding that, we recommend that tenants take steps to liaise with their landlord as soon as possible with regards to handing the property back and dealing with any end-of-term provisions as may be required.

If the lease benefits from security of tenure under the 1954 Act, the lease will continue until it is terminated by one of the prescribed methods:

  1. Serving notice pursuant to section 27 of the 1954 Act (giving at least 3 months’ notice) on the landlord to bring the lease to an end. Whilst there is no prescribed form for the section 27 notice, we recommend engaging Real Estate Disputes to prepare it on your behalf to ensure that any relevant statutory requirements are complied with.
  2. Termination by ceasing business occupation at the end of the contractual term. This is the simplest way for a tenant to terminate a fixed-term tenancy. We recommend that tenants take steps to liaise with the landlord regarding their intention to terminate to ensure all obligations at the end of the lease are sufficiently dealt with.
  3. Termination by notice to quit.
  4. Surrender in accordance with the statutory procedures.

If the tenant wishes to remain in occupation and renew their lease for a new term, the process will depend on whether the lease has the protection of the 1954 Act or not. The lease renewal process can be complex and includes statutory deadlines. We recommend seeking legal advice from our Real Estate Disputes team at an early opportunity to ensure your position as tenant is protected.

Either, or both, of the parties, may have a contractual right to terminate the lease before the expiry of the lease term. This might be on a fixed date, or at any time following a certain period of notice. Careful attention should be paid, when serving notice, to the length of the required notice period, the correct recipient and service address, and valid methods of service. A party wishing to exercise a break right must also comply strictly with any conditions that may need to be satisfied before the break right can be validly exercised, such as paying all rent due and giving back the property without any remaining occupants.

Legal advice should be obtained on any conditions a landlord looks to impose during the negotiation of a lease. There are well-accepted positions across the market and each condition must be considered from a legal and commercial perspective to ensure that the break will be operable by the tenant, should it wish to activate the right.

Early legal advice should be sought before a break date to ensure valid termination of a lease pursuant to a break right as it is a well litigated area of law. Our Real Estate Disputes team advises on the preparation and service of break notices and the satisfaction of break conditions.

Most commercial leases reserve a right for the landlord to re-enter the property at any time and “forfeit” the lease at any time in certain circumstances. The usual circumstances are non-payment of the annual rent, material breaches of the tenant’s obligations in the lease, and insolvency of the tenant.

It is important to take legal advice if you receive a notice from a landlord specifying any breach of the terms of the lease. A failure to take remedial action may lead to the landlord having the right to forfeit the lease. Our Real Estate Disputes team can advise on a tenant’s options in response to any such notice.

A landlord and tenant may mutually agree to bring the lease to an early end. This would be documented in a deed of surrender. When ending a lease by consent in this way, it is open to the parties to negotiate conditions, such as the extent to which the parties will be released from their obligations, and any financial settlements in return for the release.

There are some situations when a lease will be deemed to have been surrendered, even if the parties have not completed a formal deed of surrender. This happens if the parties behave in a way that is incompatible with the continuation of the lease, such as the tenant vacating the property and the landlord accepting the keys or going into occupation, or the grant of a new lease of the same property between the same parties, for an extended term or larger demise. This can leave uncertainty about the terms on which the lease has come to an end and the parties should take legal advice before proceeding.

This is rarer than the other situations we have outlined, but if the tenant under a lease obtains the landlord’s legal interest in the relevant property, the tenant technically becomes both the tenant and landlord. Depending on the terms of the transaction by which the interest is passed it may be appropriate to make an application to the Land Registry to “merge” the two interests so that the lease is terminated. It is important to check that doing this will not have unintended consequences, such as extinguishing legal rights required for the use of the property. You should seek legal advice before merging legal interests.

A tenant might also consider ending its occupation of the property without terminating the lease by disposing of its interest in the lease either by assigning it to a third party or granting an underlease of the whole or part of the property to another. If the tenant grants an underlease, its interest under the lease continues and it will receive rent from the undertenant which will occupy the property. Whether the tenant is permitted to assign or underlet will depend on the terms of its lease and, as both options will leave the tenant with residual liability, tenants should take legal advice.

Tenant actions before lease termination

At the end of the lease, however this comes to an end, it is important to consider the terms of the lease and understand the state of condition in which the tenant is required to return the property to the landlord. Many commercial leases require the lease to be kept in “good and substantial repair and condition” which caselaw has decided includes an obligation for the tenant to put it in repair if it is in disrepair to start with. However, some leases may make the general repair obligation less onerous by referring to a schedule of condition, which limits the tenant’s repairing obligation to the condition set out in photos in a schedule attached to the lease.

The tenant will need to arrange to repair, decorate, and reinstate in compliance with the terms of the lease. The lease may require the tenant to decorate in the final months of the lease term in colours and materials approved by the landlord. It is prudent for the tenant to plan and undertake this work and obtain any necessary consent. The tenant would need to comply with the terms of the lease and any consents before reinstating alterations if required and making good on any damage caused by removing them.

At the end of the term, there will be discussions with the landlord about the works the parties consider necessary to put the property into the state of repair and condition required by the lease, known as dilapidations. The landlord will inspect the property and the parties will usually negotiate the works required or any sums to be paid to settle the cost of such works.

We strongly recommend that any notice received from the landlord in respect of dilapidations is considered or dealt with by our Real Estate Disputes team to ensure that your position is protected. It is not unusual for leases to require compliance with notice provisions for reinstatement, which may ultimately impact the overall reinstatement claim made by the landlord. It will be vital that any schedule received from the landlord is considered in detail against the reinstatement terms of the lease to ensure the landlord’s claim is limited to reinstatements permitted by the lease or relevant statute. Finally, please note that there may be tax implications for both landlords and tenants in relation to the payment of damages for dilapidations.

From a practical perspective, once the lease has ended the tenant will need to return all keys for the property to the landlord. The tenant will also need to inform utilities and any other suppliers that it has vacated and settle final bills.

Address the risks

There are many factors that tenants will need to consider when bringing their leases to an end – the method of termination, the process to be followed and points to be dealt with before and at the end of the lease. Tenants should seek legal advice before deciding how to proceed to make sure they are not tripped up by any of the risks along the way.

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