“Exit” options in existing Leases – COVID19

Posted by the team on 4th April 2020

exit business lease covid 19
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If you are a Tenant, and you have come to the difficult conclusion that it is no longer viable to continue your Lease (even if you can renegotiate the rental payments), then you may want to consider what “exit” options you have.

We have set out below the usual exit routes out of Commercial Leases:

  • Serving a Break Notice – if there is a break option in the lease, and a break date is in the near future (but not so near that notice cannot be served in time…) consider serving a break notice but be sure to check the specified procedure for (1) the form of notice (2) the method of serving notice (3) on whom to serve the notice (4) where to serve the notice and (5) any conditions to the break which must be met before the break date. Often, a break will be subject to conditions such as paying all rent up to date … if that is not feasible due the circumstances, unless you can agree for the Landlord to waive that condition, then this may not be a suitable option.
  • Assignment – usually you will need your Landlord’s prior consent to do this, and you will be asked to cover the Landlord’s costs involved in providing such consent. Accordingly, this option is not without cost, and can take time to firstly find a suitable new tenant (with a financial covenant strength acceptable to the Landlord) and secondly, for the legal due diligence and transaction to be completed.  Although, not all businesses will be adversely affected by COVID-19 (in fact, some may be prospering), the market is likely to be limited.  Further, although by assigning the lease you are transferring your interest in it, the Landlord may ask that, as a condition to consenting to an assignment, you enter into a guarantee and indemnity, meaning that you may be “on the hook” if the new tenant does not adhere to the tenant covenants.  It is therefore important not only to satisfy the Landlord’s requirements, but for your own benefit, to check that the new tenant is financially sound and has a viable business plan for the use of the premises.
  • Underletting/ Sub-letting – as with assigning the lease, this process will most likely require the Landlord’s costs to be paid (as well as your own costs) and the usual transaction process to be followed which will take time. Unlike an assignment, underletting generally takes longer and costs more to prepare the legal documentation.  This option also does not enable you to “walk away” from the Lease; instead it makes you an intermediate Landlord which can come with its own difficulties.
  • Negotiate a Surrender with the Landlord – whether this will be agreed will come down to the bargaining strength of the parties, and may require you to pay the Landlord a premium to get out of the Lease and also pay their costs connected to the surrender transaction. The Landlord will also want you to give back the Property in accordance with the terms of the Lease, which may require alterations being reinstated and repairs being required that might not be practical given restrictions presently in place.  Alternatively, the Landlord may be willing to accept a payment in settlement of any disrepair.
Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.

If you would like to discuss your options, our Commercial Property Team are here to guide you through the various routes available.