18 FAQs about getting out of a business premises lease
- What are the options for getting out of a lease?
- Which is the best option for getting out of a lease?
- How can I strengthen my negotiating position?
- What is a break clause?
- Can I get out of a lease if a rent review makes the premises too expensive?
- Can I negotiate to terminate the lease even without a break clause?
- What can I do if I can show that the landlord has broken the terms of the lease?
- Is my landlord likely to accept the termination of the lease?
- How much will it cost to terminate the lease?
- What will happen if I simply walk away from the property?
- Am I allowed to assign the lease to another business?
- Can my landlord stop me assigning the lease to another business?
- If I assign the lease, will I be free of any future liability?
- How much does it cost to assign a lease?
- Can I sublet the premises?
- Can I choose what terms I sublet the premises on?
- What are my liabilities if I sublet the premises?
- How much does it cost to sublet the premises?
1. What are the options for getting out of a lease?
The options you have will depend on the terms of the lease.
You may be able to terminate the lease. For example, the lease may have a break clause. Or you may be able to negotiate the termination of the lease with the landlord.
You may be able to assign the lease - in other words, sell the lease to a new tenant.
A third possibility might be to sublet the premises, or part of them. While this will not get you out of the lease, the income from subletting will cover part or all of your rent.
2. Which is the best option for getting out of a lease?
It depends on your circumstances and the terms of the lease.
Terminating the lease provides the cleanest exit. Normally, you have no continuing liabilities to the landlord after the lease is terminated.
Assigning the lease is generally less clear-cut. Depending on the terms of the lease, you may well be left with some liabilities. You often end up either liable for all future payments owed by any future tenants, or having to guarantee some or all of the next tenant's payments.
The process of assigning a lease can be more costly and time-consuming than terminating a lease. As well as finding the new tenant, you will need to negotiate with both the new tenant and the landlord.
If your lease has less than two years to run, it is often preferable to terminate the lease to avoid the costs and risks of assigning it. However, if there is longer left to run, assigning your lease is usually the best way of realising any value it has.
While subletting can be a way of improving your cash flow, it is not a satisfactory way of getting out of a lease. The original lease remains in force, and you retain all your liabilities.
3. How can I strengthen my negotiating position?
Think first about the landlord's position. The landlord's priority is generally to ensure that they have a reliable tenant. Often the crucial factor is whether you can find a high quality tenant to whom you can assign the lease (or who will take a new lease if yours is terminated).
Try to find out any other details about the landlord's position which will help you negotiate. For example, if the landlord has cash flow problems, they may be happy to negotiate for an immediate cash payment in place of future rental income.
Make it clear to the landlord what risks they face if you cannot get out of the lease. For example, if you are in financial difficulties, let the landlord know: they may prefer a negotiated agreement to the risk of seeing your business fail and default on the rent.
Plan your negotiating strategy carefully. Think about what concessions you can make and which you would prefer. For example, it may be preferable to pay a cash sum for a clean break rather than guaranteeing future payments.
Finally, use your, or your adviser's, negotiating skills. Don't give your position away. If the landlord knows you are desperate to get out of the lease, they will be in a stronger position.
4. What is a break clause?
A break clause in a lease gives you the automatic right to terminate the lease at one or more specified dates. You will still have a problem if you want to get out of the lease before the specified date, or after the specified date has passed.
Be careful. Break clauses often require a tenant to give a set period of notice to bring the lease to an end. There may also be conditions such as a requirement that you have complied with your obligations under the lease to pay the rent and keep the premises in repair. If you fail to fulfil the conditions you will no longer have the right to terminate the lease.
5. Can I get out of a lease if a rent review makes the premises too expensive?
There is no automatic right to get out of a lease just because the rent has increased.
You may be able to challenge the proposed new rent if it is too high. For example, if the rent is based on 'open market value', your advisers may be able to make a case that the open market value is lower than the figure the landlord proposes.
Failing that, you will be faced with negotiating with the landlord. If you face genuine financial difficulties, the landlord may be prepared to negotiate the termination of the lease, or a lower rent, rather than risk seeing you default.
6. Can I negotiate to terminate the lease even without a break clause?
You can negotiate at any time to terminate the lease, or to change the terms of the lease.
7. What can I do if I can show that the landlord has broken the terms of the lease?
The fact that your landlord may have broken the terms of your lease will probably not entitle you to bring the lease to an end. Nevertheless you may be able to take legal action against your landlord for any losses that you have suffered as a result. If the breach is ongoing you may be able to apply for a court order that your landlord complies with their obligations.
Alternatively, you may be able to use the landlord's failings as a factor in your negotiations to bring the lease to an end. In practice it is usually better and cheaper to negotiate a solution than to take court proceedings.
8. Is my landlord likely to accept the termination of the lease?
It is likely to depend on market conditions. Your landlord is more likely to accept a deal if the local property market is strong, so that they expect to be able to find a new tenant (possibly at a higher rent).
You also need to do everything possible to strengthen your negotiating position.
Unless the lease gives you the right to terminate it - for example, through a break clause - the landlord is under no obligation to accept a deal.
9. How much will it cost to terminate the lease?
You will need to pay for your professional advisers - usually your solicitor, and often a surveyor. Under the terms of the lease, you will usually also pay for your landlord's professional advisers. Obviously costs will mount if the negotiations are drawn out.
You usually negotiate a payment, based on current market conditions, to terminate the lease. If the local property market is weak, this could be substantial. Conversely, you might be able to negotiate for the landlord to pay you if the property market is strong and the rent on your lease is below market levels.
You may be liable to pay for dilapidations - repairs and redecoration - if the lease requires you to return the premises to their original condition.
You will also have other costs such as vacating the premises and relocating.
10. What will happen if I simply walk away from the property?
You will still be liable under the terms of the lease. Unless you are insolvent, the landlord is likely to take legal action against you to recover any money you owe, and their legal costs.
By simply walking away, you are likely to reduce the chances of a new tenant taking over the premises soon. The amount the landlord claims from you will therefore generally be larger than it would be if you negotiated a termination of the lease.
11. Am I allowed to assign the lease to another business?
That depends on the terms of the lease. Leases for less than three years often prohibit assignment. The lease (and the premises' planning permission) may also restrict the permitted use of the premises. This can prevent you from assigning the lease to tenants who carry out different businesses.
If the lease does allow you to assign it, you will usually need the landlord's consent.
12. Can my landlord stop me assigning the lease to another business?
You usually need the landlord's consent to assign the lease. Typically, the landlord cannot 'unreasonably' withhold consent. They can impose conditions but these must be reasonable.
The key issue is usually the financial standing of the proposed new tenant. The landlord may well ask to see the proposed tenant's accounts, ask for references, and use a credit rating agency to check their creditworthiness. They may ask for a deposit and if the proposed new tenant is a limited company, the landlord may also ask for personal guarantees from the directors of the company.
13. If I assign the lease, will I be free of any future liability?
Usually not. Leases which began before 1 January 1996 are usually subject to 'privity of contract'. This means that you are liable to the landlord for all future payments under the lease, by any future tenants. This may also apply even if you yourself took on the lease after 1 January 1996.
For leases which began after 1 January 1996, the landlord is usually entitled to require you to guarantee payments by the next tenant (but not by any tenants after that). If you are not prepared to give this guarantee, the landlord may be entitled to withhold consent to the assignment.
14. How much does it cost to assign a lease?
When you assign a lease, there are three sets of professional advisers involved: yours, the new tenant's and the landlord's.
Under the terms of the lease, you will usually be responsible for paying for both your and the landlord's advisers. Of course, you can negotiate with the new tenant how these costs will be shared between you.
If the lease is attractive, the new tenant will usually pay you a premium - for example, if the rent is below market rent, or if the new tenant will also be getting goodwill attached to the business for which you have been using the premises. But you might have to pay the new tenant to take on the lease - for example, if the rent is high or the premises are dilapidated.
You will also need to cover the costs of finding the new tenant, such as the commission charged by any agents you use, and your own relocation costs.
15. Can I sublet the premises?
The lease will specify whether you can do this and any restrictions. For example, some leases allow you only to sublet the entire premises, not part of them.
Your landlord's consent is usually required.
16. Can I choose what terms I sublet the premises on?
The lease may include restrictions. Some leases restrict what rent you can charge.
Usually, you will want to sublet on similar terms to your own lease, so that your tenants are covering your liabilities. You cannot give the subtenant any rights which you do not have under your own lease.
Your landlord usually has the right to approve the terms of the sublease before consenting to it.
17. What are my liabilities if I sublet the premises?
You retain all your original liabilities under the lease, as it remains in force.
In practical terms, this means you will have additional responsibilities for managing the premises. For example, if there is a problem, your subtenant is likely to look to you to sort it out, even if you then refer it to your landlord.
18. How much does it cost to sublet the premises?
As with an assignment, there are usually three sets of professional advisers involved: yours, your subtenant's, and the landlord's. The landlord's costs are usually significantly lower than for assigning a lease. In particular, the landlord will not need to investigate the subtenant's creditworthiness and negotiate payment guarantees.
You will usually be responsible for paying for both your and the landlord's advisers, though you can negotiate with the subtenant to cover some or all of these costs. You will also pay any costs of finding the subtenant.