As the COVID-19 virus continues to spread, a compulsory lock-down for businesses in the UK may lead to many commercial tenants considering their options to terminate a lease. Many tenants may consider whether their lease can be ended by ‘frustration’.
‘Frustration’ is a contractual principle whereby an intervening occurrence makes performance of the contract significantly different from the original intentions of the parties. It is unknown whether a lease would be ‘frustrated’ by this pandemic, as this principle has not been tested in the UK courts previously in respect of a lease. Similarly, a ‘Force Majeure’ clause in a lease gives an option to terminate a following unforeseeable circumstances, however it is not common to see such a clauses a in modern commercial lease. So what options are available?
This will be the most common method for a tenant to terminate a lease before the end of the contractual term. It is an official date in the lease, which has already been agreed by the parties, where the lease can be ended without any penalties. The right to break the lease may arise on one or more specified dates or be exercisable at any time during the term of the lease on a rolling basis. The terms and conditions of any break clause should be considered carefully, and evidence of compliance kept as a record. Common conditions can include:
- Service of a formal notice. This should usually be given up to 6 months prior to the specific break date. Specific attention should also be paid to any other notice provisions in the lease that aren’t in the break clause itself.
- The tenant must usually give vacant possession of the property at the date when the lease is to come to an end, and this must be strictly complied with.
- As a tenant, you should ensure that you pay any outstanding sums due if required, even if these are in dispute. You should also ensure that you are aware of all the money you owe, including interest on any overdue payments.
- The tenant may want to be sure that it has complied with its repairing obligations under the lease. In order to do this, the tenant may ask the landlord to prepare a list of items that are in need of repair, and for which the tenant is responsible under the lease. This list is known as a schedule of dilapidations. If you agree to carry out works to the property before the break date, ensure that they are completed before the break date.
- The lease may require the tenant to remove signage, reinstate alterations and redecorate the property. You should also check supplemental documents, such as any licences granted for works to the property, in case these contain obligations that are relevant to the break.
- If you are obliged to pay any sums in advance, such as rent, service charge or insurance rent, then ensure that these are paid even if this goes beyond the break date itself. The landlord will usually be obliged to refund any part of those sums that can be attributed to the time after the lease ends, but your solicitor can check this in your lease.
Leases being held over under the Landlord & Tenant Act 1954
A business tenancy that has not been excluded from the provisions of the LTA 1954 will not end automatically on the end date of the contractual term. The tenancy continues on the same terms with the same rent until it is terminated by one of the prescribed methods in the LTA 1954.
If the tenant wishes to terminate the lease, then the most straight forward thing to do this is to give up occupation before the end of the contractual term. However, where the Tenant has remained in occupation after the end of the contractual term, they can bring the lease to an end but only by giving at least three months’ notice to the Landlord. As with a break clause all rents and monies should be paid until the expiry of this period and the tenant should comply with all lease obligations, including any relating to repair and decoration.
Negotiation with Landlord
These are unprecedented times for landlords and tenants, and a simple upfront conversation with your landlord may lead to an agreement that could be beneficial for both parties. For example, parties may wish to consider:
- restructuring future break dates or rent reviews;
- a temporary relaxation/suspension of rent or service charge payments under the lease in exchange for the tenant agreeing to waive a future break date;
- a temporary relaxation/suspension of rent or service charge payments under the lease in exchange for an extension of the remaining lease term if it is due to expire soon.
There are several options that can be considered via negotiation between landlord and tenant that can be beneficial for both parties long term, and this may be especially attractive for the landlord if they are more likely to have a financially stable tenant to pay rent once the pandemic has passed.
- Compliance with statutes – tenants should remember that most modern commercial leases will contain an obligation on the tenant to comply with all statutes. As the government guidance changes rapidly, businesses must remember that failure to comply with such directives could result in breach of covenant.
- Vacant Premises – should your property need to be closed following government guidance, your lease will likely contain an obligation not to leave the premises unoccupied for more than 21 days without notice to the landlord, and arrangement of appropriate security measures.
It is vital that tenants take expert legal advice when considering their options to terminate a lease in these difficult times. For further information about your options to terminate a lease or any matter relating to your commercial lease, please contact our Commercial Property team on 01323 407555 or email@example.com
SO Legal Solicitors Eastbourne – 01323 407555
SO Legal Solicitors Brighton & Hove – 01273 069920
SO Legal Solicitors Hastings – 01424 709050
SO Legal Solicitors Uckfield – 01825 729840
SO Legal Solicitors Notting Hill – 0203 9677700