Lease Termination & Surrenders
There are three main ways in which a lease can be determined - the legal term for ‘terminated’:
- Lease termination at the end of the contractual term
- Surrender of the lease
- The exercise of break clauses within a lease
There are a number of other ways that a lease can be determined and these are mentioned briefly at the bottom of this page. This page, however, focuses on the termination and surrender of business tenancies (leases).
1. Lease termination at the end of the contractual term
“Inside” or “outside” the Act?
This is always the first question that property professionals ask when they are considering the best procedure for terminating a lease. What they are effectively asking is whether the lease enjoys security of tenure under the relevant provisions of the 1954 Landlord and Tenant Act (“the 1954 Act”). If it does, then it is “inside” the 1954 Act. If it does not, then the lease is considered to be “outside”.
The majority of business leases are inside the 1954 Act. The primary purpose of the 1954 Act was to provide the business tenant with the right to renew its lease at the expiry of the contractual term on essentially the same grounds as originally agreed, other than the amount of rent the tenant will have to pay.
Either the landlord or the tenant can determine the lease, however the process varies considerably depending on who is seeking the termination and whether the lease is inside or outside the 1954 Act.
Landlord determining the lease
To determine a lease inside the 1954 Act, the landlord can commence the process by serving the tenant a statutory notice in the form required by the 1954 Act. A notice of this nature is known as an opposed section 25 notice, indicating that the landlord wishes to seek the return of the property to the landlord with vacant possession. This notice can be served on the tenant at any time but no more than 12 months before the end of the contractual term. Crucially the notice must specify one or more of seven grounds of objection to the tenant renewing its lease. The seven grounds of opposition are:
- Breach of the repairing covenants
- Persistent arrears
- Other breaches
- The landlord is able to provide suitable alternative accommodation
- The lease was a subletting of part only and the continuing letting of the part reduces the rental value of the whole
- The landlord intends to demolish and reconstruct the property or carry out substantial works of reconstruction (commonly referred to as redevelopment)
- The landlord intends to occupy the property
Of these grounds of opposition some, such as redevelopment, are mandatory. If the landlord establishes a mandatory ground, a court determining the matter must deny the tenant a new lease and hand back the property with vacant possession to the landlord. Other grounds are at the discretion of the court.
In the event that the landlord is able to establish certain of the grounds, such as redevelopment, the tenant is entitled to statutory compensation. The amount of statutory compensation payable depends on the rateable value of the property and the length of time during which the tenant - and any predecessors in title carrying on the same business - have been in business occupation of the property. In the event that the tenant and its predecessors have been in occupation for business purposes for up to 14 years the compensation amount payable is the rateable value. Where the occupation has been for more than 14 years, the compensation is twice the rateable value.
Tenant determining the lease “inside” the 1954 Act
The process is relatively straightforward for a tenant who wishes to terminate the tenancy; however, the process depends upon what stage the tenancy has reached:
The tenant can simply vacate the property either prior to or on the end date of the contractual term.
In the event that the tenant remains in occupation following the end of the contractual term, the tenant may determine the lease by serving a statutory notice under section 27 of the 1954 Act.
By discontinuing any application or proceedings in process for a new lease.
“Outside” the 1954 Act
Prior to committing to a lease - either by entering into the lease itself or a contract which results in the grant of a lease - the parties can, if they both agree, use the process set out in section 38 of the 1954 Act to exclude the security of tenure provisions of that Act from the particular lease.
As a result, at the end of the contractual term, the lease determines and the tenant has no prima facie right under the 1954 Act to a new lease. The lease will come to an end automatically at the expiry of the contractual term. It is imperative, however, that the landlord by its actions does not create what is known as a periodic tenancy by, for example, demanding rent. In the event that a periodic tenancy is created, the landlord can only determine the periodic tenancy by service of a notice to quit. However the creation of the periodic tenancy will give the tenant statutory rights to a new lease under the 1954 Act. Should the landlord still require the property back, they would then have to go through the process of establishing a ground for objection.
2. Surrender of the lease
During the course of a contractual term, the landlord and tenant can, if they agree between themselves, determine the lease. This can take one of two forms:
A formal deed of surrender is entered into between the landlord and tenant setting out the terms upon which the tenant surrenders the lease and hands back the property to the landlord. Terms can be agreed regarding the payment of monies from either landlord to tenant or tenant to landlord, depending on the circumstances and the reasons why the parties have reached an agreement to surrender the lease.
From a tenant’s point of view, a deed of surrender should ideally contain a release from all continuing obligations and subsisting breaches under the terms of the lease. The tenant, in other words, should be able to walk away from the lease without the fear of a large dilapidations claim landing on its doorstep a week later. Depending on the terms negotiated between the parties, the ideal scenario is for both parties to walk away from the lease without any fear of a claim from the other party arising following the date of surrender. Whether this is achievable will depend upon the circumstances and the negotiations between the parties which will be set out as commitments within the deed of surrender itself.
Surrender by operation of law. There are certain acts that can be agreed by the landlord and tenant together that enable both parties to treat the lease as being at an end. The conduct of both parties must unequivocally amount to an acceptance that the tenancy has ended, for example by the relinquishment of possession and its acceptance by the landlord. Neither the landlord nor tenant should dispute that the tenancy has ended. There must be a clear agreement by either the landlord or the tenant that the tenancy is ended, indicated by the tenant quitting the premises and the landlord taking possession; the giving and taking of possession must be unequivocal.
3. Exercising break clauses
Break clauses that can allow either a tenant or a landlord to determine the lease early on one or more specific dates have become common in fixed term leases. The clause itself will contain necessary formalities and conditions to ensure that the break option is validly exercised. Failure to serve a valid break notice, or comply with the other required formalities and conditions, can mean that the tenant may lose the opportunity to determine the lease and therefore remains liable and committed to the property and their long-term commitments and obligations. The courts take the view that the tenant must comply strictly with the provisions within the lease surrounding the exercise of the break clause.
The tenant, in exercising the break, has to be sure that sufficient notice under the clause is given; that the notice is in the correct format; and it has to be served on the correct recipient, in accordance with the provisions of the clause and the lease generally.
Many break clauses contain a number of conditions which must be complied with to enable the tenant to properly exercise the break and determine the lease. Conditions within a break clause must be strictly complied with. The courts have determined, in effect, that if the break clause requires you to serve notice on blue paper and you serve it on grey then the break clause has not been validly exercised!
Most break clauses require, at the very least, the payment of annual rent until the break date. Unless specified, the annual rent has to be paid to the quarter day following the break date and not apportioned to the break date itself. The break clause may require the tenant to comply with all its obligations under the terms of the lease. As such, any existing breach of any of the tenant’s covenants will invalidate the exercisable break. A tenant’s solicitor who is negotiating a break clause needs to be mindful of these draconian hurdles. A properly advised tenant, for example, should only agree that the annual rent (not any other payments deemed to be rent such as insurance and service charges) would need to be paid, and there should be provisions for the repayment of any annual rent paid for the period following the break date.
A break clause can be in favour of the landlord although there are additional complications involved. In order for any landlord’s break clause to be enforceable the lease has to be “outside” the security of tenure provisions of the 1954 Act. The landlord’s break clause in a lease that has not been excluded simply has the result of determining the lease with the consequence that the tenant has prima facie the right to a new lease under the 1954 Act. The landlord would then need to serve an opposed section 25 notice establishing a ground or grounds for objection to deny the tenant a new lease.
Other ways of terminating a business lease
As mentioned at the start of this page there are other ways in which the lease can be terminated and these are briefly outlined below:
In an insolvency case a tenant’s liquidator or trustee in bankruptcy may disclaim a lease if it is considered to give rise to a liability to pay money or perform obligations; or if the property is not readily saleable. A disclaimer determines the lease and releases the tenant from any further liability.
A lease may well contain a right for the landlord to terminate the lease in the event that rent has been unpaid for a set period of time from its due date; or if the tenant has failed to comply with their obligations under the terms of the lease. There are other procedures a landlord must undertake before forfeiting a lease and in certain circumstances the tenant has the right to obtain ‘relief’ from a forfeiture application to court.
In certain circumstances a court may rule that a breach of a fundamental provision entitles the innocent party - either landlord or tenant - to treat the lease as terminated as well as being able to sue for damages.
This is a rare scenario where a lease that is granted for over 300 years, with at least 200 years to run, may be enlarged by a tenant into a freehold estate under the relevant provision of the 1925 Landlord and Tenant Act.
A lease may be discharged by frustration. Frustration is an ancient legal principle which allows one party to terminate an agreement when some unforeseen event occurs that renders the agreement physically or commercially impossible to fulfil. The unforeseen event must be so fundamental to the agreement that it cannot be performed and it must have been something that was beyond the contemplation of the parties at the time the agreement was entered into.
Notice to quit
Where there is a periodic tenancy as opposed to a lease with a fixed term, this may be terminated by notice to quit served by either party. The notice has to provide for termination on a date at the end of one of the periods for which rent is payable.
Commercial property law is complicated and the devil is very much in the detail, especially in the area of business leases and their termination. A wrong step can have expensive consequences. Negotiation skills, attention to fine detail and extensive practical experience are just some of the qualities that LCF Law’s specialist property lawyers apply to achieve the best outcomes for you and to protect your business interests. If you need to determine a commercial property lease, why not get in touch with us to find out how we can help you achieve the outcomes you want - whether you are a tenant or a commercial property landlord?
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Led by Paul Anderson, the team at LCF Law handles a range of matters, including commercial leasing work, portfolio management issues, contracts, and warranties. Clients include retailers, nationally-prominent charities, and healthcare organisations. Harriet Thornton specialises in leaseholder enfranchisements for tenants and landlords, while Ann-Marie Casey has particular expertise in assisting the firm’s charity clients.
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