Seven steps to prepare for an exit or surrender of a commercial leaseJuly 22, 2020
As the conditions of the property market continue to change and evolve, both landlords and tenants are having to consider the best way to exit or surrender a commercial lease. We have outlined some of our top tips to prepare below:
- Agree the exit in writing. It is possible to have an implied surrender of a lease; where typically the keys are simply handed back. The act of handing the keys back can have legal effect, as the surrender of the lease can be inferred from the actions of the landlord and the tenant. However, this often makes things more complicated and creates ambiguity. Therefore, we recommend to always get a written agreement in place – typically a deed of surrender.
- Check who the main parties are. It can be important to confirm the identity requirements for the parties and check the title position. This is to make sure the correct parties enter into the agreement and have the authority to hand back the lease.
- Confirm if there will be vacant possession (VP). Sometimes, underleases are in place and there can also be occupiers in situ, sometimes under verbal agreements. This should be confirmed and inspection may be required. It needs to be clear that occupiers will leave and if VP will be handed back to the landlord (along with all of the keys and alarm codes).
- Ensure the involvement of the bank. Often there will be lending and registered mortgages. The holders of the charge often need to consent or be involved for land registry purposes. It is often worth speaking to banks or lenders as soon as possible to make sure they will provide any necessary consents.
- Check for dilapidation or existing lease breaches. What about breaches of the repair clause or other breaches of covenant? If the lease is part way through, there may be repair items needed or even tenants alterations to consider. Will the tenant carry out the works, reinstate items or pay money as compensation for not having done so (i.e. a dilapidation payment)? If possible, a landlord may prefer not to release a tenant until this is agreed, as it can be harder to enforce obligations after the tenant has left.
- Confirm whether a contract is needed. If the surrender is taking place at an agreed future date or if there is a due payment, premium or inducement, then an agreement for surrender can be used. This contract should be exchanged before the actual deed of surrender. This can deal with legal compliance (there can be a cooling off notice procedure under the 1954 Act, if the lease has security of tenure). The contract can also deal with payments, such as rent apportionment, service charge balancing and tax issues, such as the SDLT or the VAT position on any payments.
- Gain prior approval for title removal/closure. It is important to be clear on any necessary registration and how they get done. In some cases there may be insolvency risk, which makes it harder practically to obtain co-operation on questions from the land registry. This could delay re-letting. Therefore, we recommend the landlord should obtain prior approval to remove the lease from their title and close any title for the tenant's lease.