We have witnessed a growing number of occupiers that are exploring the options to dispose of their commercial leases in the wake of the pandemic. For many, there has been a significant shift in the way that businesses operate and occupy commercial space. There are a number of options when it comes to deciding how to exit a lease before the lease expiry or tenant break options, but each is associated with its own risks and opportunities.
If you are looking to exit your premises, most often the landlord will not be willing to give up their contractual right to income and there needs to be a commercial opportunity for them as well. This could be through finding a new tenant for the property or potentially through the landlord’s desire to redevelop the premises. Early discussions with your landlord can help you understand their parameters for a deal.
As a tenant, you will often need to bring a new occupier to the table to open options of disposing of your lease, whether it is an assignment, sub-letting or agreeing a surrender. It is important to engage a commercial agency surveyor early in the process to understand the potential options available to you. This will establish the mechanisms in which the lease can be disposed, the current market conditions and the likelihood of being able to achieve an exit through marketing the premises.
Assessing your total lease liability is key to weighing up the most preferential exit in terms of risk and cost. Appointing a building surveyor to establish any potential dilapidations liability will enable you to be well informed to negotiate your position both financially and logistically.
An assignment of a lease is the transfer of a lease to a third party who will become the new tenant. The third party or ‘assignee’ will pay rent directly to the landlord and take over all the responsibilities in the original lease. As a condition of the assignment, it may be necessary for the original tenant to enter an Authorised Guarantee Agreement, which provides the landlord with a guarantee if the assignee becomes insolvent.
In a sub-lease the original tenant continues to pay rent to the landlord, but the sub-tenant would pay the original tenant a rent under the sub-lease. Dependent on your lease terms, it may be possible to just sub-let part of your premises, giving you the opportunity to downsize in situ whilst covering costs for space that you no longer occupy.
Another option may be to negotiate a surrender of the original lease subject to a grant of a new lease to a third party. This may involve payment of a reverse premium by the original tenant which contributes towards the cost of dilapidations and an incentive for the ingoing tenant.
The financial strength of a proposed third party on an assignment or sub-letting is a key risk that should be considered, as in either scenario the original tenant could have liability under the original lease if the third party fails to meet their obligations under the lease.
Lambert Smith Hampton has a multi-disciplinary team of chartered surveyors in agency, building consultancy, valuation and lease advisory who are well placed to take a holistic view of your situation and evaluate your best route forward.