Can I exit my lease without having to involve a third party?
The first place to start is to check the remaining length of your lease and whether there are any contractual rights for you, as tenant, to break the lease early.
You will need to check the conditions of any break right carefully. It is usual for breaks to be exercisable on a specified number of months' notice, conditional upon the yearly rent and service charges due up to the break being paid in full and for vacant possession to be delivered on the break date.
The lease itself will normally specify requirements for serving the break notice. Once you have decided to exercise the break, you should engage a solicitor to prepare the break notice.
Can I ask my landlord to accept a surrender of the lease anyway?
Yes but, as a surrender is a consensual process, you cannot unilaterally require a landlord to accept a surrender and it will be entirely at the landlord's discretion whether to agree to this and, if so, on what terms.
In a market where office space is less sought after, it is likely to be more challenging to secure a landlord's agreement to proceed with a surrender (unless the landlord has other plans for the space).
Depending on the remaining lease term, a landlord is likely to ask for a premium to be paid in return for accepting a surrender and releasing tenant covenants. This is known as a reverse premium and is generally not subject to SDLT for either the landlord or the tenant (but can be subject to VAT). The level of the reverse premium is often reflective of the landlord's assessment as to how long they expect the premises to remain vacant, taking into account loss of rent and rates exposure for that period. In challenging reletting markets, surrender premiums will be higher on that basis.
I have no contractual breaks, but there might be interest in the market from a third party for the space. Can I essentially sell the lease?
Most leases of office space will permit some alienation. This will commonly be either a right to assign (i.e. transfer) the lease, or to underlet the premises (in whole or part), to a third party.
It is usual for the landlord's consent to be required for either an assignment or an underletting. Ordinarily, the landlord's consent is expressed so that it cannot be "unreasonably withheld". This means that the landlord must provide "reasonable" grounds to withhold consent. Some leases will specify certain conditions that a landlord is entitled to require and will be deemed to be acting reasonably, if they do.
What are the primary factors to consider on an assignment?
- Engaging a property agent will assist you to market the lease and they will be able to advise you as to the terms you are likely to achieve, for example, whether a purchaser would pay a premium for the lease.
- When a potential purchaser has been identified, the deal will mostly likely be conditional upon the landlord's consent being obtained. The assignment provisions of the lease need to be carefully checked to ensure any relevant conditions are complied with. Some leases contain a right of first refusal (or pre-emption right) for the landlord. Where this applies, the proposed deal for the sale of the lease must generally be offered to the landlord before the sale can proceed.
- The covenant strength of the purchaser and their ability to comply with the tenant covenants in the lease for the remaining lease term (particularly the payment of rent and meeting repair obligations) will be key to a landlord. A landlord will often ask to see a trading history for the proposed purchaser of at least three years. Covenant weaknesses can sometimes be made up for with a parent company guarantee, rent deposit or bank guarantee.
- It is usual for leases to require the outgoing tenant to guarantee the new tenant's covenants in the lease, under a document called an authorised guarantee agreement (an "AGA"), for so long as the purchaser remains the new tenant. This needs to be considered in the context of the purchaser's covenant strength, their risk of default and whether you are comfortable with keeping residual contingent lease liabilities within the original tenant entity. Some AGA's can permit the landlord to ask the previous tenant to effectively take back the lease, if the new tenant enters into an event of insolvency. Where an AGA is given, the lease is not therefore fully "off balance sheet".
What are the primary factors to consider on an underletting?
- Underlettings are usually be less desirable than an assignment because the original tenant remains contractual on the hook for rent and other lease liabilities to the landlord. These liabilities are passed down to the sub-tenant but this means that there is reliance on the ongoing covenant strength of the sub-tenant.
- The terms and conditions for the landlord's consent and any associated rights of pre-emption must also be checked, as in the case of an assignment.
- Many leases specify that a sub-lease must be granted at least at the level of rent in the primary lease. This can present difficulties in a falling rental market where the market rent is not as high.
If I am unable to exit my lease, are there other options?
Although a landlord cannot be required to agree to variations in a lease, it can sometimes be useful to open a discussion with your landlord with a view to changing certain parameters that might make the lease more viable for you over the medium to longer term.
This can include:
- New rent frees, rental reductions or fixing an upcoming rent review to a level of rent that can be managed; and/or
- Inserting new tenant breaks in the event that the space is not viable in the medium term. This might be in return for the payment of a break premium.
Variations to the lease, particularly rent reductions, will be assessed by a landlord in terms of effect on their residual values and against their own financial commitments. Where rental variations are agreed, it is often in return for an extension to the overall lease term or removal of a tenant break (although this is not always the case).