Can a tenant terminate their lease if the premises are no longer needed?

Ending of the lease is most likely not high on the priority list when a tenant is taking up a new lease. Nevertheless, it is important to understand the position as to how the lease can be terminated. The circumstances can change over time and the premises that are a good fit now, might not be as suitable in a few years’ time.

It is important to understand that obligations under a lease continue until the lease or the relationship between the parties is terminated. The main ways to terminate the lease arrangement are as follows:

• Break right
• Surrender
• Alienation
• Disclaimer
• Forfeiture

Break right

Break right is a contractual right granted to the tenant, or both parties, to end the lease earlier than the full term normally on a set date(s) subject to giving the other party a minimum notice. It is important to remember that not every lease does have a break right; it would have to be agreed between the parties. The tenant’s right is often subject to conditions which need to be considered very carefully as onerous conditions can easily frustrate the tenant’s right to break the lease early.

Surrender

There are various ways in which a lease can be surrendered. It is however important to remember that surrender is a consensual arrangement between the landlord and the tenant and cannot be effected without an agreement from the landlord.

Alienation

Alienation is a term that covers options for the tenant being able to transfer (assign) their existing lease to another party or underlet the premises to an undertenant. In other words, the lease does not end, but the tenant’s obligations under the lease are transferred, in full or partially, to another party.  The right to assign the lease or underlet the premises can be subject to various conditions set out in the lease. One of the common conditions, is the requirement for the outgoing tenant to provide an authorised guarantee agreement guaranteeing the new tenant’s compliance with the lease obligations which should be considered carefully as if the guarantees are provided the original tenant will remain liable under the lease.

Disclaimer

This is a statutory power available to the liquidator or trustee in bankruptcy to disclaim any interest of the company or of the individual in onerous property. When a lease is disclaimed on one of the parties’ behalf, any ongoing obligations relating to the property would end. For obvious reasons, this option is not easily available and would not be of assistance in most circumstances where the premises are simply no longer needed.

Forfeiture

Forfeiture means re-taking possession of the property by the landlord. Generally, the right to forfeit must be set out expressly in the lease. Any landlord would give this option a very careful consideration as forfeiture is subject to various statutory and common law limitations, and if a lease is forfeited, any interests that stem from the forfeited lease come to an end too. Interesting question of whether the landlord’s actions amounted to forfeiture was considered in the unusual case of NPS (40GP) Limited v Liberty Commodities Limited [2023] EWHC 2137 (Ch).

The landlord had to dispute a claim by their tenant that their lease had been forfeited, after their key card access to the building had been revoked following routine maintenance.

The lease between the parties was for a term of 10 years, with the annual rent of £3.1 million to be payable by equal quarterly payments. The tenant was in financial difficulty and so began negotiations for a surrender of its lease. Although an agreement was not reached, the tenant failed to pay the rent due on 25 March 2022.

On 8 April 2022 the landlord carried out routine maintenance to the building, which involved deactivating existing keycards and letting tenants know that new keycards were available on demand, however, new cards were not requested and therefore not issued to the tenant. The tenant vacated the premises and later alleged that the deactivation of the keycards had amounted to a forfeiture of their lease. A forfeiture of the lease on 8 April 2022 would mean that all obligations to pay the rents due would have ended on that date. By the time the landlord’s claim was made, the tenant’s arrears were substantial and continuing to accrue.

In the legal proceedings the landlord’s position was that the lease was continuing and that rents were still due under the lease. The tenant asserted that the lease specified that if the basic rent remained unpaid 14 days after its due date, the landlord could re-enter the premises, and that the key card maintenance was an act by the landlord to forfeit the lease.

It was held that the lease was ongoing and that, not only did the landlord not have the required grounds to forfeit (had it wanted to), but the landlord’s actions did not amount to re-possession: only access to the common parts of the building had been affected. The second floor of the building, operated by the tenant’s own access system, had remained in use by the tenant which further supported the landlord’s case. The tenant also did not state at any point whether any of its employees asked for keycards and were refused the same. Additionally, the tenant had continued to negotiate a surrender of the lease after vacating the premises, which went against the notion that the lease had already been forfeited by the landlord.

As can be seen, understating the ways to terminate the lease which may be no longer needed is as important as any other aspect of the lease. Without contractual rights which must be negotiated before the lease is signed, it is difficult to end the relationship if the parties cannot reach consensus. Commercial leases are very much subject to commercial terms agreed between business parties and as such not many statutory protections can be called upon if the lease for a fixed term is no longer needed.

Please don’t hesitate to contact our property team if you have any questions.