Surrender of a commercial lease

What is a Commercial Lease Surrender?

A surrender of a lease is the voluntary termination of the lease before its contractual end date by mutual agreement between landlord and tenant. It occurs when the tenant gives up their rights in the property and returns possession to the landlord, causing all future obligations under the lease to end (unless specifically preserved).

How does a lease surrender work?

The tenant usually initiates the surrender process and the underlying reason for requesting a surrender is usually financial difficulty. The Landlord will then consider whether surrender is the best available option for him/her/it and if so, the parties may then negotiate the terms, which may include retention of deposit and other payments by the tenant.

Deed of surrender

If agreement is reached a formal deed of surrender should be drafted and signed by both parties and the tenant vacates the property and returns the keys to the landlord. There may be other formalities such as applying to the Land Registry where the tenant’s interest has been registered, to cancel and remove the leasehold interest.

Informal surrender of lease

Sometimes, the parties opt for a less formal approach whereby surrender happens by conduct. This is rarely the best option, especially for Landlords.

Surrender by conduct is where it can be shown that the tenant took steps to indicate a desire to end the tenancy by returning keys for example and other steps, and the Landlord can be shown to have accepted the surrender. Simply handing back the keys is not sufficient for a tenant to demonstrate the Landlord’s agreement.

Risks of lease surrender

A significant risk for the tenant (or the previous tenant where the lease was assigned and an Authorised Guarantee Agreement is in place) is where a guarantee has been given. This can easily catch out a tenant where a deed of surrender is signed which preserves liability for any breaches of the lease up to the date of surrender and liability for dilapidations.

From the Landlord’s perspective, if the Landlord does not negotiate a financial settlement (including specific provisions in the deed of surrender preserving rights to pursue existing claims) from the tenant as part of the surrender the risks include :-

• if the property remains unoccupied for more than 3 months, the Landlord then becomes liable for paying business rates.

• once a lease is surrendered, the landlord loses their right (in commercial leases where repair costs can be substantial) to pursue dilapidations claims against the tenant. If the property is in poor condition, the landlord cannot recover repair costs and any existing schedule of dilapidations becomes unenforceable. In short, the landlord must bear all costs of bringing the property back to repair.

• If the tenant's obligations are personally guaranteed, unless otherwise agreed in a deed of surrender, in commercial leases where repair costs can be substantial, a surrender extinguishes the lease and all obligations under it, including a supporting guarantee.

Alternatives to Surrender

If a tenant wants to terminate a commercial lease before its expiry date, there are a few alternatives to surrender:

• Assignment - The tenant finds a new tenant to take over the lease, subject to the landlord's approval.

• Subletting - The tenant allows a third party to occupy the property under a sublease agreement, which will typically need the landlord's consent.

How we can help

We have a very large team of specialist commercial property lawyers in many UK locations.  Our lawyers are experienced and provide practical advice for Landlords and Tenants dealing with lease surrender, including negotiating, drafting or reviewing a deed of surrender,  or other options to terminate a lease or find another solution. Please do get in contact by email or phone.