In a landscape where the average commitment of an occupier company to a property is 7 years, sometimes an unforeseen early way out is needed from lease obligations. Where there is a mutual agreement between a landlord and an occupier that the lease can come to an end, a surrender can be agreed but it shouldn’t be done without careful consideration on both sides as to how to document the agreed terms.
Surely a landlord with an occupier on the hook for a defined term would be unlikely to agree to surrender the lease?
True but the landlord may, for example, have additional space which the occupier would like to move into (perhaps larger or at higher rent) or there may be another tenant with a strong covenant waiting in the wings who may want to commit for a longer term. The landlord may even want to use the space itself and agree to pay the occupier a premium to surrender the lease. For both parties there is likely to be a commercial reason driving the surrender.
How does a surrender occur?
The key to affecting a surrender is mutual agreement between the parties. This can be demonstrated by completion of a deed or where there is action taken by the landlord and occupier to show that both believe the lease has come to an end, such as the landlord accepting back the keys (also known as “surrender by operation of law”). To avoid inadvertently accepting a surrender by operation of law, landlords should stipulate the terms upon which they accept back keys from a tenant.
There are a number of points to consider when entering into a deed of surrender:
- Will there be the payment of a premium by either the landlord or occupier? This will depend upon who has the negotiating power.
- Are you surrendering whole or part? If part only, do you need to vary the ongoing lease at the same time as the surrender takes place? Rent, service charge percentages and rights may all be impacted.
- Are any third party consents required? Perhaps lender consent? Sometimes surrender of an underlease requires consent of the head landlord.
- If relevant, who will close the registered titles?
- What is happening regarding dilapidations? Often a sum will be agreed upfront and documented in the surrender document so that both parties can make a clean break.
- Will the occupier require a refund of rent / service charge paid in advance of the surrender dates? An occupier’s solicitor should provide in the deed for such a refund.
- Are you going to be able to reconcile any service charge balancing payment on the surrender date? If not, both parties will want to provide for the balancing provisions to remain enforceable in case a refund or further payment is due.
What about the Landlord and Tenant Act 1954 (“Act”)?
If the lease to be surrendered is excluded from the Act then the Act is not relevant. However, if the lease is within the provisions of the Act then it may be necessary to go through a formal statutory notice procedure in order to validly carry out the surrender.
What else do I need to know?
Undertenants - a surrender, unlike a break clause, does not terminate an underlease so landlords should make enquiries of the occupier as to whether there are any parties with an interest in the property.
VAT- the VAT position is dependent upon who is paying what to whom, and the VAT status of each of the parties’ interests. It is important to check the position to avoid any unforeseen VAT payment falling due.
Stamp Duty Land Tax (“SDLT”) - if the landlord pays the occupier a premium, the landlord will be liable to pay any SDLT due on the premium. A payment made by the occupier does not fall within the scope of SDLT.
Timing- where the parties agree to proceed without an agreement to surrender, the timing for the surrender can be uncertain, as either party could change their mind at any point. Entering into a formal agreement to surrender can avoid this uncertainty and set an agreed surrender date.