Exiting a Commercial Lease Early in London Without Overpaying

Start with your break clause, and follow it exactly

If your lease has a break clause, it is usually the cheapest way out. It is also where most expensive mistakes happen. Courts read break conditions strictly, so a small error can cost you the break, and you stay liable for the rest of the term.

Most break notices have to be served six to twelve months ahead, in a set form, on the right party at the right address. Following the Marks and Spencer v BNP Paribas case, you should assume you will not get back any rent paid for the period after the break date unless the lease says you will. Budget for the full quarter's rent.

• Serve the notice exactly as the lease requires, and keep proof of service
• Pay all rent, service charge and insurance in full by the break date
• If the break depends on giving vacant possession, remove all people, furniture and belongings and hand back the keys
• Check whether the break depends on meeting repair obligations, as this can be the hardest condition to satisfy

Negotiating a surrender with your landlord

If there is no break clause, or it is years away, you can offer to surrender the lease. The landlord does not have to agree, so the deal depends on how much it wants the space back. In London that varies a great deal. A landlord with a well located unit in a strong West End or City pitch may see a surrender as a chance to re-let at a higher rent. A landlord with dated offices in an outer borough, where vacancy rates are higher, will be more cautious.

Surrender premiums commonly fall somewhere between six and eighteen months' rent, but this depends on how long is left on the lease, how easily the space will re-let, and how much work the landlord will need to do first. One strong bargaining point is empty rates. After a short period of relief (usually three months for offices and shops, six for industrial), the landlord pays full business rates on empty space. In central London that can come close to the rent itself, so point this out when you negotiate.

Assignment and subletting

Assignment means passing the lease to a new tenant, who takes over the rent and obligations. Most leases require the landlord's consent, which cannot be unreasonably withheld, and under the Landlord and Tenant Act 1988 the landlord must deal with your application within a reasonable time. Expect to be asked for an authorised guarantee agreement. This means you guarantee the new tenant until it assigns in turn, so choose someone financially strong.

Subletting lets you recover some of the rent while keeping the lease. Many London leases say you cannot sublet below the passing rent, which is a real problem if market rents in your area have fallen. You remain fully liable to your landlord either way.

The costs people forget

Whichever route you choose, dilapidations are usually the biggest cost people did not plan for. A landlord's schedule for a central London office after a full fit out can run into six figures, although the amount it can actually recover is limited to the loss in the building's value. Getting your own surveyor to check the schedule often reduces it a lot.

Also budget for your own legal and surveying fees, and often the landlord's too, which most leases make you pay. Paying a surrender premium or receiving one can have tax consequences, so speak to your accountant before agreeing figures.

A sensible order of play

Start at least twelve months before you need to leave. Early planning gives you more choice about which route to use and gives the landlord less leverage.

• Get the lease reviewed, including any licences and side letters
• Commission an early assessment of dilapidations liability
• Get a view on local rents and demand for your space
• Choose your route and open talks before any deadlines put you under pressure
• Put everything agreed in writing through solicitors, never on a handshake

Common questions