The surrender of a lease is a mutual agreement between the landlord and tenant to bring a commercial lease to an end prematurely, thus transferring the property back to the landlord’s interest.
Surrendering a lease is often the case for commercial leases with no break clauses, as it frees both the landlord and tenant from their obligations of a lease if either party encounter an issue at any time during the duration of the lease. The tenant, for example, may offer to surrender the lease if they are struggling to meet their obligations under the lease such as paying rent.
How to surrender a lease?
A lease can be surrendered by two ways:
- Formally by Deed of Surrender
- Implied terms by ‘operation of law’
A Deed of Surrender is a written agreement between the landlord and tenant, which sets out the termination of the lease with immediate effect. The Deed of Surrender must be signed by both parties and their signatures must be witnessed.
Surrendering a commercial lease by operation of law is where both the landlord and tenant act in a way that is inconsistent with the lease continuing. This would amount to an acknowledgement of both parties to indirectly agree to the termination of the lease.
A surrender of a lease by operation of law is usually a quicker and cheaper alternative to the formal route of a Deed of Surrender. However, the main concern surrounding the operation of law is that it is based on implied terms. This leaves scope for uncertainty in relation to the intentions of the landlord or tenants’ actions, and whether the lease was actually surrendered. There needs to be absolute clarity of the intentions of the landlord and tenant through their conduct when surrendering a lease by operation of law.
The key requirement of surrendering a lease through operation of law is that there must be some form of unequivocal act from both the landlord and tenant accepting that the lease has come to an end. This could be the tenant handing the keys of the property back to the landlord, and the landlord to then lease the premises to a new tenant.
The landlord, however, is not obliged to agree to the surrender. A landlord may disagree to the surrender, for instance due to the difficulty of letting commercial premises.
If the landlord does not wish to surrender the lease then they need to act with caution to prevent unintentionally surrendering the lease. Any act committed by the landlord which is perceived as agreeing to the surrender of the lease, even if the landlord did not intend to surrender the lease, will be seen as an act of surrendering the lease.
Landlords protecting their property
There are exceptions in place for the landlord to protect the property when a tenant vacates the property and hands back the keys to the landlord. A landlord will not be deemed to have accepted surrender of a lease if they decide to secure the property by changing the locks and marketing the property on the market. In the case of Padwick Properties Ltd v Punj Lloyds Ltd , it was found that the landlord acted reasonably when securing and marketing the property after the tenant vacated the premises.
Negotiating a surrender of a lease
Before the lease is officially terminated, the landlord and tenant will need to enter negotiations to clarify the outstanding obligations and liabilities between the landlord and tenant, and who will bear the cost associated with surrendering a lease.
Areas of disputation include:
- Compensation for future loss of rent
- Outstanding obligations and liabilities
- Will there be any premium to be paid?
- Who will pay for the legal costs for the surrender?
What happens after surrendering a lease?
Once a lease has been surrendered, the tenant will no longer be liable for any contractual obligations in the lease. If there are any obligations which have not been met by the tenant before the surrender of the lease, such as unpaid rent, the tenant would still be liable to pay any outstanding obligations occurred before the surrender of the lease.
It is advisable for the landlord to take legal advice in regards to the due diligence of surrendering a lease to avoid unexpected liabilities.
If there was an underlease or sublease, the property will not be vacant and the tenant on the underlease will not be liable for any of the terms set out in the original lease. The tenant of the underlease or sublease, known as the subtenant, will now become the tenant of the landlord under the terms of the underlease or sublease. Therefore, landlords need to be wary of any subleases when surrendering the original lease as the terms set out in the sublease may be unfavourable to the landlord.