If your rent is too high, business circumstances have changed or there's a great opportunity to move to better premises, you might want to get out of your existing lease. Understanding the possibly barriers and how to overcome can mean you're in a position to move when you need to
What are your options for getting out of a lease?
Options depend on your lease. You may be able to:
- terminate the lease under a break clause;
- negotiate termination with the landlord;
- assign the lease - ie sell it to a new tenant;
- sublet the premises, or part of the premises.
Terminating a lease under a break clause
If you can terminate the lease at a specified point because there is a 'break clause' included in your lease, you may have no continuing liabilities to the landlord. Check the notice you have to give the landlord, and that you have complied with conditions in the lease, such as keeping the premises in a good state of repair (any breaches may mean you lose you the right to terminate the lease).
Terminating a lease when there is no break clause
If you can negotiate a termination, you may have no ongoing liabilities to your landlord. In return you may have to pay a fee for terminating the lease, any professional fees incurred, and the costs of repairs and redecoration.
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Assigning a lease
Finding a new tenant to take over your lease - someone to 'assign' it to - is usually the best way of realising any value the lease may have in it. But leases with fewer than three years left often prohibit assignment, or you may need your landlord's consent (which usually can't be unreasonably withheld). There may also be restrictions on use, which will limit the types of business you can assign to.
If you can assign, you'll usually be legally liable for all future payments owed by the next tenants, or have to guarantee some or all of their payments. The landlord may try to negotiate other payments from you that you may be able to pass onto, or share, with the new tenant.
Assignment negotiations can cost more and take longer than negotiations to terminate. You will have to:
- find the new tenant (and may have to pay an agent to help);
- negotiate with both the new tenant (for example: who will pay the landlord's professional fees? will the new tenant pay you a premium, or vice versa?) and the landlord.
If your lease has less than two years to run, it's probably better to negotiate to terminate the lease, to avoid the costs and risks of assigning it.
Subletting your premises
Rental from subletting could cover part or all of your rent and leave you free to move, but subletting won't get you out of the lease - you retain all your liabilities as a tenant, and you will have the additional burden of managing your sub-tenant.
Subletting may not even be allowed under the terms of your lease - check the lease for restrictions on subletting. You may need the landlord's consent.
Strengthen your negotiating position
Whether negotiating an assignment or termination with the landlord, put yourself in the landlord's shoes:
- Is the market strong? The greater the number of potential new tenants out there, the more accommodating the landlord is likely to be with you.
- Does the landlord have cash flow problems? If so, the landlord may want a quick agreement.
- Has the landlord breached the lease? Use that in your negotiations.
You need judgement, experience and a good knowledge of the local commercial property market. Use both your own and your adviser's negotiating skills. Don't give your position away. If the landlord knows you are desperate to get out of the lease, you won't have the upper hand.
If in doubt, take legal advice.