Entering into a commercial or retail lease agreement is a commitment that should not be taken lightly, however there are options to break a lease if you wish to upsize, downsize, cease trading or sell your business.
A variety of factors will determine the cost of breaking a commercial lease, including the terms of the lease agreement, if it has a break clause, and how long before the lease end date. It is recommended that a commercial property specialist/solicitor is engaged to review the lease terms and provide tailored advice.
Generally, the lessee (tenant) will be required to pay rent until a suitable replacement is found as well as any shortfall between what they were paying and what any new tenant pays, for the remainder of the lease. Any rent increases agreed to in the original lease must also be accounted for.
The lessee is also generally responsible for the costs of finding a replacement tenant including legal fees, real estate agent commissions and advertising costs. They may also be liable for the costs of returning the property to the condition in which they took it.
Often, lessees will engage a commercial real estate agent to find a replacement tenant on behalf of the landlord. In any case, the various lease transfer methods must be understood. There are three main commercial lease exit options, Assignment, Sublease and Surrender.
Lease Assignment:
When a lease is assigned, the rights and obligations of a lease agreement are legally passed to another entity.
This is the preferred method for tenants wishing to break a commercial lease as once the lease is assigned they will no longer have any liability.
However the landlord’s permission to assign the lease must be sought and they will usually have input on the quality of any new prospective tenant.
If the landlord deems the new tenant to be a higher risk then they may require the original lessee’s personal or bank guarantee remains in place for security purposes.
Where the terms, conditions, financial guarantees and risk associated with a new tenant remain comparable to the existing tenant, the landlord will likely accept a complete assignment of the lease and its obligations, and the original lessee is absolved of any further responsibility.
Sublease:
A sublease occurs when a lessee rents out part of a commercial or retail property to another tenant.
The original lessee remains liable to the landlord for fulfilling the obligations of the head lease including rent, outgoings and property damage, while any personal or bank guarantees will remain in force.
The landlord’s consent is required to sublease a property, however lease agreements usually stipulate that consent cannot be unreasonably withheld.
While it may be possible to sublease an entire property, an assignment is usually the preferred method in that instance.
When negotiating a sublease with a new tenant, it is important to ensure relevant terms such as the length of the lease, any options to renew, and make-good clauses are consistent with the head lease.
Surrender:
Surrendering a lease means negotiating with the landlord to let you exit the lease entirely and take back the property.
It is a formal process and will provide a quick exit, however an exit fee (surrender amount) will likely be payable. The amount will vary largely depending on market conditions and the remaining term of the lease.
If the market is buoyant and the landlord feels it will be easy to find another tenant for the property then the surrender amount will likely be far less than in a deflated market.
And if you have an extended period left on your lease, the fee will likely be far higher than if you are nearing its end.
For further information on breaking a commercial or retail property lease, please contact us for a confidential discussion.
