Project managing an exit from leasehold premises
Timing and thorough planning are key to a smooth exit from leasehold premises. There are numerous points to consider. Here, we will examine the most prominent issues. You should review your documents and establish the technical legal position for each issue at an early stage, writes Isabel Wightman-Cooper, Senior Associate, Birketts.
You will then be in a position to negotiate for a more favourable outcome. Any variations to the strict legal position should be legally documented.
If you underlet or assign your lease, you will have more control over timing which can be managed by a contract.
If the term is due to expire and the lease is ‘contracted out’ of the Landlord and Tenant Act 1954 you may need to approach your landlord to identify whether an extension will be possible.
If you have statutory rights to a renewal you may have greater flexibility but it should be managed through a solicitor. Exercise of a break clause will generally require six or more months’ prior notice to the landlord which may be tied to a fixed date and require satisfaction of conditions as discussed below.
Returning the property
Did you carry out any alterations to the property? The lease and licence to alter will determine whether you must reinstate your own and potentially a predecessor’s alterations.
You will be required to make good any damage caused when carrying out the works. Whether a landlord will waive the relevant obligation will be at the landlord’s discretion and may depend upon whether any incoming tenant will require their removal or whether the property is being developed by the landlord. In some cases landlords will agree a compensation sum in lieu of carrying out works. If you are exercising a break clause you must comply with the lease terms precisely or the break may not be legally effective. You need to agree any landlord’s requirements in sufficient time to carry out the works before the break date.
You must return the property in the state of repair required by the lease. Is there a schedule of condition? If there is no minimum standard then technically you may need to carry out repairs even where you have not caused damage.
There may also be obligations to repair the landlord’s fixtures and fittings. It is advisable to agree with the landlord any works required and record this as a schedule of dilapidations.
There are legal limits on the extent of dilapidations and legal advice should be obtained. If you are exercising a break right, non-compliance may invalidate the break.
If the term is due to expire and works are not carried out the landlord will have an ongoing claim and may retain part or all of any rent deposit. If you are assigning or subletting the landlord may be able to legally withhold consent until outstanding repair works are carried out.
Vacant possession will nearly always be a requirement. You must vacate entirely and cannot do so in stages. This extends to storage of items. A breach could invalidate a break right.
Upon exiting your lease you will be seeking a return of part of a number of payments made in advance: rent, rent deposit, service charge and insurance rent.
If you are assigning or subletting this may involve working with the incoming tenant to ensure that a proportion of rent, service charge and insurance rent are paid through your solicitor as part of the completion process.
The rent deposit will be returned directly by the landlord less any deductions. The rent deposit deed will determine the timing of the payment and it may not be available at completion itself.
If you are exercising a break right or the term is expiring you may not be entitled to a return of rent paid in advance but you are more likely to be entitled to a return of the service charge and insurance charge in respect of the period after the termination date.
The return of the rent deposit will depend upon whether there are any breaches enabling the landlord to retain the whole or any part. There may be additional interest but there is no obligation to hold the sum at a good interest rate.
After a lease has terminated a landlord can continue to make a claim for a breach which occurred during the term.
This is less likely in a break right scenario since the landlord would upon receipt of the tenant’s notice begin identifying breaches as a pre-condition to the break. The major issue here would be whether the break is legally effective should a breach be revealed post completion. If the term has simply expired the most likely claims are dilapidations or rent arrears.
If an undertenant causes a breach of your own lease you may be required to take enforcement action. On an assignment you are most likely to have guaranteed your immediate successor therefore your release will be when your successor is no longer tenant and any outstanding breaches have been resolved.
• You can call Isabel Wightman-Cooper on 01223 326630 or email her at isabel-wightman-cooper [at] birketts.co.uk