How can I terminate a commercial lease?

If you are a tenant of commercial premises there may be a point where circumstances change and you want to move out.  Whether your business has simply out-grown its current premises or the business is not performing as you had hoped, your options are essentially the same.

With average lease terms of nine years in Jersey, many tenants believe that they are tied into their current lease for many years, with no option to relocate. However, that is rarely the case.

Does the lease include a break clause?
If you want to terminate your lease then the first point to check is whether the lease contains a break clause. Typically, a well-negotiated commercial lease for a term of nine years may have a right to break the lease at the end of year five. Other, more flexible break arrangements are also available.

However, if you did not request a break right from your landlord when heads of terms were being negotiated, it will be difficult for your lawyers to negotiate a break clause part way through the lease. For that reason, we would strongly advise you to seek the opinion of a property lawyer before signing heads of terms with a landlord.

If your lease does contain a break clause then there will be a number of procedural points to deal with in order for the break to be effective. For example:

• Notice must be served on the landlord (strictly in accordance with the lease requirements)
• Notice must usually be served in writing not less than six or 12 months before the break date
• All rent and service charges must be paid in advance up to the break date
• All sub-leases or licences to occupy must be terminated prior to the break date
• All tenant’s covenants must be complied with up to the break date

It is crucial for the tenant to understand that any condition to the exercise of a break right must be strictly adhered to. For example, if the lease states that the tenant must comply with all covenants and obligations up to the break date, then the break option could be invalidated by something minor such as the windows being dirty on the break date.

This is because the lease may contain an obligation on the tenant to clean the windows, and such break conditions are strictly interpreted by the courts. This may seem unfair, but having a well-negotiated lease will help to mitigate the risks for the tenant.

What if the lease does not include a break right?
All is not lost. A commercial lease will usually permit the tenant to assign (i.e. transfer) the lease to a third party who would like to take the premises (assignee). If the landlord has reasonable concerns about the financial strength of the assignee, he can either withhold consent to an assignment or seek some additional security from the assignee.

The most common forms of security are a third party guarantee or rent deposit. A rent deposit is a sum of money (usually either six or 12 months’ rent) which is held by the landlord and can be drawn upon in the event of a tenant breach, such as non-payment of rent.

Another option is to grant a sub-lease of premises to the third party who wants to occupy. This means that the original tenant remains responsible for the payment of rent to the landlord, but the new occupant (sub-tenant) pays rent to the tenant who then pays the rent to the landlord.

A sub-lease can be a useful solution where the landlord has concerns about the viability of the new occupant. The landlord is more likely to grant consent to a sub-lease because he knows that the original tenant remains “on the hook” even if the sub-tenant defaults.

From the tenant’s perspective, a sub-lease carries the risk that the sub-tenant will not pay the rent or will perhaps damage the premises, leaving the tenant exposed and unable to cover the costs. For that reason, an assignment would usually be preferable.

Can I give the keys back and walk away?
Not unless the landlord agrees to take the premises back.  However, there are circumstances where the landlord would accept a surrender of the premises, perhaps where the landlord wants to develop the property or believes that he could achieve a higher rent in the current market.

If the landlord would be willing to accept a surrender of the lease, then he would usually demand a surrender premium from the tenant as compensation for the loss of future rent / cost of dilapidations (repair) of the premises.

In return, the tenant should be released from all past and future liability under the lease.

Want to learn more?
At Bedell Cristin, we have a team of commercial lease experts who can advise you on every step of your leasing transaction, from negotiating heads of terms to dealing with break options, assignments, sub-leases and surrenders.

For a no-obligation discussion and fee estimate, please call our property experts.