What can I do to permit early termination of my Lease?
A commercial lease will be granted for a set period (known as the term). Over the term of a lease, circumstances may change for a Tenant. The Tenant should negotiate sufficient flexibility at the outset to enable it to either sell on the lease during the term or bring its interest to an end by agreement with the Landlord.
What does alienation mean?
Alienation is the voluntary act of an owner of the property to dispose of the property. This includes a right for the property to be sold or otherwise transferred from one party to another. The main types of alienation under a lease are the ability to charge, sell or transfer the lease or to grant an underlease to a third party, all usually subject to the Landlord’s consent.
How can the Lease be sold or transferred?
A lease may be assigned (sold) to a third party purchaser (assignee) or it may be underlet to a sub-tenant.
The Landlord will always seek strict control over the ownership of its leasehold property to maximise the strength of its rental stream and property value. It will need to be satisfied that any purchasing tenant ( assignee) or any sub-tenant can properly discharge its tenant obligations (in particular, rental payments) under the lease.
The lease will include a series of conditions that must be complied with before the Landlord will grant consent to any sale or disposal. It will also set out certain criteria which, if they apply, will allow the Landlord to refuse consent to any such proposal. If the lease includes these provisions, the Tenant cannot later complain that the Landlord has unreasonably refused its consent if it elects to impose any such condition. For example, the Landlord may require the new Tenant to provide satisfactory references, to enter into a Rent Deposit Deed and/or provide a guarantor for the tenant covenants in the lease.
In addition, the outgoing Tenant may be requested to enter into an Authorised Guarantee Agreement (see below) guaranteeing the performance of the tenant covenants by the new Tenant.
Once the terms of the assignment have been agreed, the Landlord’s Solicitors will prepare a draft Licence to Assign, which effectively grants consent to the out-going Tenant to assign the Lease to the new Tenant. This document must be executed by each of the Landlord, Tenant and New Tenant. If the Landlord has additional requirements, such as the out-going Tenant entering into an Authorised Guarantee Agreement guaranteeing performance by the new Tenant, this will be included within this document as a term of the consent to assign. The Landlord’s costs in preparing this document are normally met by the outgoing Tenant under the terms of the lease.
Once the Landlord’s consent is obtained, the out-going Tenant and new Tenant can finalise the agreed assignment and if there is a price (premium) being paid for the lease, this will be paid to the outgoing Tenant by the new Tenant on completion under the contract for sale between those parties following the grant of the consent to the transaction.
What is an Authorised Guarantee Agreement?
An Authorised Guarantee Agreement (AGA) is a common tool used by Landlords to ensure that any out-going Tenant remains liable for payments due under the lease as a condition for its consent to a sale. This effectively provides it with an insurance policy if the new Tenant defaults and fails to comply with its obligations. The AGA therefore makes the out-going Tenant a guarantor of the new Tenant.
This is not ideal for the out-going Tenant, as once they have left the Premises, they will not want any further liability for the Premises. It is however ideal for the Landlord, as they enjoy the benefit of the lease rental stream and now they have additional protection that if the new Tenant falters, they can also claim against the former Tenant.
Commercial Leases generally state that sharing possession or occupation of Premises with a third party is prohibited unless it is to a group company of the Tenant (and no relationship of Landlord with the group company is created).
Some leases will include a provision permitting an Underlease of the whole of the Premises to a third party.
As with an assignment, the Landlord will look to impose conditions on the giving of its consent to the Underlease. The purpose of such conditions will be to control the length of the Underlease (which must by definition be shorter than the term of the Lease), ensuring that it can be readily terminated if required and that the terms of the Underlease are substantially the same as the lease to the Tenant.
What other options are available?
− Break Clause
It may be possible (and recommended on a term that is more than five years in length) to negotiate at the outset with the Landlord (under the Heads of Terms) a break clause with the Landlord. This may allow the Landlord, Tenant or both by mutual agreement to terminate the lease after a certain period of time has elapsed. Such terms should be reviewed carefully. The Landlord may wish to impose conditions on the exercise of the break which if not complied with could render the break clause ineffective. Tenants and Landlords should always seek legal advice before negotiating or exercising a break option.
The other option may be to agree with the Landlord to end the lease early by entering into a Deed of Surrender which will operate to terminate the lease and extinguish the remaining obligations of either party under the Lease including a complete release for the benefit of both parties. The Landlord is not obligated to agree to a surrender of the lease, and as such, it will usually require payment from the Tenant in consideration of the Landlord’s accepting the surrender. This may include a request for payment of rent due for the unexpired term but such terms will be open for negotiation between the parties depending on the location and value of the property, the unexpired term of the lease and the rental market for the property. Once again, tenants should seek independent legal and valuation advice before agreeing to any surrender premium or surrender terms with a Landlord.