How to end a lease by agreement
A landlord and tenant can mutually agree to end a lease at any point before the expiry of the term (or any period of holding over). The arrangement of the landlord taking back the lease is called a surrender. There are two ways in which a surrender can take place. Either expressly via deed, or by a process called the ‘operation of law’. An express surrender must be recorded in a deed, otherwise it will be deemed void.
The parties could consider whether or not they want to make the surrender conditional, as per future events, or fixed to a future date. If this is the case, they could consider agreeing and entering into an agreement to surrender, which will record the terms of when and how the surrender will take place. An agreement to surrender is particularly useful in situations where certainty is needed regarding a future surrender date, or whereby one party is paying the other a surrender payment.
A surrender by operation of law relates to the conduct of the landlord and tenant in the action of bringing the lease to an end – i.e. the tenant returning the property and keys to the landlord and the landlord accepting that the lease has come to an end. The conduct, and not always the intention, of the parties is important and therefore it is important to seek legal advice to ensure that a landlord and tenant do not accidentally enter into a surrender by operation of law, despite their intentions to the contrary. There are a number of stated examples of how a landlord has accidentally accepted a surrender by its conduct. It is important that all parties are careful and fully understand the circumstances.
In theory, it is possible for there to be a surrender of part of a leasehold property by operation of law, but it would always be advisable to undertake such a surrender (of part) by way of express deed.
Please note that some payments, by either the landlord or the tenant, will attract notification of the transaction to HMRC and also potentially the payment of Stamp Duty. It is always advisable to speak to your solicitor about this to check for any liability. Please also see below reference to the payment of VAT on a surrender premium.
Tips for Landlords
1. Check for mortgages – A mortgage can survive a surrender and therefore you must make sure you obtain appropriate discharge documentation from the tenant.
2. Check for underleases – An underlease may also survive the surrender. This is the case even if the tenant underlet the property without consent.
3. Land Registry – make sure you have appropriate identification evidence (ID1 or ID2) before accepting the surrender from the tenant (if no solicitors are acting for the tenant). A review of the registered title will reveal the existence of any mortgages or registered underleases – any registered lease will need de-registering after the surrender has taken place.
4. Searches – A review of pre-surrender searches (your solicitor will order these) will help you identify any changes i.e. registration of mortgages or new registered underleases or even bankruptcy notices.
5. Inspection – Carry out a full inspection of the property before taking the surrender to make sure there are no major breaches of the lease and no additional occupiers. Check that the landlords items of fixtures and fittings are still in the property and in working order. You should make sure you collect all keys, security passes and passwords etc in advance.
6. Contracting out procedure – If you are using an agreement to surrender and the lease has security of tenure you must follow the standard statutory procedure before entering into the agreement.
7. Competition –Do you need the tenant to enter into a non-competition clause to protect your property/business?
8. Media – Do you need to make sure you take from the tenant title and the relevant passcodes for any social media, website and emails accounts, etc.?
Tips for Tenants
1. Liability – If you are negotiating a surrender, you will want to make sure you have a full release of your liabilities under the lease particularly all past, present and future liabilities. A surrender by operation of law only specifically deals with any future liability and does not specifically exclude past liability (this is also the case in express surrenders by deed if the deed does not record the position correctly).
2. Guarantors – Guarantors are not specifically required to enter into a surrender deed but they may wish to be party to take a release of liability under the lease (See above for past, present and future liabilities).
3. Advanced rent and deposit – Make sure in any form of surrender you have recorded expressly the mechanism for the recovery of any advanced rents (paid in advance and after the date of the surrender) paid under the lease and any remaining deposit.
4. Rent reviews – Consider if there is a rent review due. Potentially unless expressly recorded the right to review remains and so does the tenants liability to pay any shortfall.
5. VAT – Check the VAT position with your accountant on any payments to the landlord (a ‘reverse premium’) or made by the landlord in consideration of them taking the surrender. VAT will need to be added to some surrender payments if the landlord has opted to tax the property but if the payment is compensation for damages it is regarded as outside the scope of VAT.
This is not an exhaustive list of things you need to consider when ending a lease by agreement, but it’s certainly some useful tips to help you along the way.
It is always advisable for the landlord and tenant to seek their own independent legal advice before proceeding with such agreements. Your solicitor will be able to advise on the best course of action and can provide the necessary documentation and due diligence checks to ensure that the transaction runs smoothly.
We hope you find this useful but please do not hesitate to contact us if you wish to discuss any of these points in more detail.
This blog post includes general legal information provided by Ancora Law and is provided for example purposes only. This information may not be suitable to your circumstances and should not be considered as a substitute for the advice of a solicitor or other appropriately qualified professionals. Ancora Law is not responsible for any loss, damage or cost resulting from any decisions that are made in reliance on the information above, including legal, compliance and/or risk management decisions.