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Tips on Termination: How to Steer Clear of a Property Crash – By Ray Arnall

Many businesses lease their operating premises. In most cases there will be a written document (referred to as “the Lease”) which should be referred to when any particular issues arise.

This article comments on issues arising at the end of a Lease of commercial premises.

Break Options

Many commercial leases of warehouse or office accommodation include a break option which would enable a tenant bring the lease to an end. Care must be taken in how the break is exercised and in particular the following issues need to be given particular attention:-

  • The notice to the landlord must be in writing and set out in proper form to comply with any lease conditions. 
  • The notice should state the correct date. 
  • The notice should be served in time – most break clauses require that the notice is served at least 6 months before the break date and failing to give sufficient time will invalidate the notice. 
  • The notice must be served on the correct landlord and at the right address, and sometimes also needs to be served on the landlord’s agent. 
  • A typical break clause in a commercial lease will set out conditions which have to be complied with if the tenant is to operate the break successfully. 
  • If the lease requires that all payments due are paid on or before the break date, it is important to ensure that all rents, service charge, insurance, interest on late payment of rent or any other payments due under the lease are paid in cleared funds to the landlord by the proper method required by the lease before the break date. Offering to pay the rent after the break date will not be sufficient. 
  • If the break date falls part way through a quarterly rent period, the rent should be paid in full for the whole quarter unless the break conditions specifically provide for apportionment on a day by day basis to the break date. 
  • If the lease requires the premises are put into good and substantial condition and reinstated on or before the break date, this condition must be strictly complied with. 
  • Almost all break clauses require that the tenant has vacated the property and gives up possession or before the break date. This can catch out an unwary tenant who may have moved out most of their equipment from the premises but any remaining equipment even in storage might amount to occupation and therefore invalidate the break. If a lease requires the tenant to give vacant possession, appropriate measures should be taken to secure the premises to avoid third parties such as squatters breaking in and occupying the premises. Preferably the tenant will meet the landlord on or before the break date and hand back the keys to the landlord so that there is no question over giving vacate possession.

What are my responsibilities at the end a lease?

Assuming you are intending on vacating the premises either under a break provision or at the end of a lease term, there are provisions which most commercial leases require although precise obligations will vary from case to case.

A tenant is usually required to put the premises back into either the condition they were in at the start of the lease or in good and tenantable repair. This will usually involve removing any alterations that the tenant has carried out and putting right any repairing and redecorating obligations. If the lease is being brought to an end by the exercise of a break option and the break conditions require compliance with the lease provisions, it is important to ensure that all such works of repair, redecoration and related aspects are carried out before the break date. In other cases, a tenant may in practice negotiate with the landlord as to whether the landlord wants the tenant’s fit out works to be removed. For example it may be that the landlord would prefer the tenant to leave internal partitioning in place, saving the tenant the cost of removal and reinstatement.

A landlord may serve on a tenant a list of repairs works – called in the trade a “schedule of dilapidations”. If you receive one of these, I suggest that you seek professional advice since it may not be the tenant’s responsibility to carry out all the work listed in such a schedule particularly in a situation where the landlord intends to demolish or reconstruct the premises or when in practice the landlord is reletting to a new tenant who intends to carry out a full refit. The landlord cannot claim for a loss that the landlord does not actually incur and there is often a “horse trade” in respect of agreeing a settlement.

The comments made, assume that the tenant wants to bring the lease to an end. Most commercial leases of offices and warehouses have protection under the landlord and tenant legislation which will enable a tenant to ask the landlord for a new tenancy at which point the landlord would be obliged to grant unless limited statutory exceptions apply. If a tenant receives a notice to quit from the landlord, but desires to remain in the premises, I would suggest that they take legal advice on their statutory rights since they may be entitled to ask for a new lease on similar terms as the existing lease.

One point often overlooked by tenants is that if they have a contractual term of lease which is coming to an end, they still have an obligation to inform the landlord that they intend to leave and vacate the property since otherwise there is a risk that the lease will “hold over” and be deemed to continue until such a notice is given. Thus if a tenant is intending to leave the premises at the end of the contractual term, it is prudent for the tenant to give the landlord at least 3 months notice of this intention.

This article is intended to flag up some of the common issues that arise on termination, and it would be prudent for a tenant to seek legal advice before taking any specific steps in particularly before serving any notices on the landlord since the wording and requirements for service of such notices can be a trap for the unwary.

Glaisyers currently offer a FREE “Lease MOT and Health Check” whereby Glaisyers will carry out a review of your lease and advise you of any particular matters such as break dates, termination rights and obligations arising in respect of repair and redecoration either during or at the end of the lease.

Contact a member of our Commercial Property to learn more.