Tenants and landlords: surrendering a lease

Over the past year sadly many businesses, both large and small, have had difficulties as a result of the ongoing global pandemic. Many are collapsing into administration and struggling to survive.

What can I do if I am a tenant?

If you are a tenant in this situation and are finding it difficult to pay your rent, there are options available to assist you if your landlord is willing to agree to them. One option is agreeing to vary the existing lease to include a rent suspension clause.  

Another option is to see whether your lease contains a break clause. If you are unsure, once we have had sight of a copy of your lease, we would be more than happy to assist. 

If you choose to exercise the break option contained within your lease this will allow you to terminate the lease early and avoid the situation where you may be unable to pay your rent in the future.

What can I do if I am a landlord?

But what if the above still doesn’t help a struggling tenant and a landlord is not receiving rent? Usually, a landlord would be able to take forfeiture action, but the Coronavirus legislation currently prevents landlord’s from obtaining possession of their property for the non-payment of rent. This has recently been extended to afford protection for tenants until 31 March 2021, for both residential and commercial tenants.

There may be little that a landlord can therefore do. But if a tenant then becomes insolvent or falls into administration, does the landlord have any more options to them?

When a tenant has become insolvent or fallen into administration, there is no guarantee that the landlord can recover sums owing to them. They will become a creditor in a line of creditors.

What happens in the case of a tenant who is insolvent?

Even more so now than before, due to the impact of Covid-19, landlords are extremely vulnerable to rent arrears and dilapidations on the property which they are facing as many tenants collapse and fall into administration. It is therefore important that the lease is surrendered properly to ensure the landlord retains their rights. 

This is usually done by a formal Deed of Surrender with the Administrators being included as a party to the Deed. As the Administrators will take control of the tenant’s business, this will include taking over the tenant’s premises and the payment of any rent arrears and costs of any dilapidations to the property.  

It is best practice for the landlord and the Administrators to agree to  surrender the lease. This enables both the landlord and the tenant to formally agree that the tenant’s interest in the property is transferred back to the landlord and both parties accept that their liability under the lease is extinguished. This enables the landlord to re-let the property. 

However, it is important that the tenant’s liability is not fully extinguished in the Deed of Surrender, so as to reserve the right for the landlord to claim sums owing to them for rents, dilapidations, etc. The amounts to be claimed must therefore be set out in the Deed of Surrender itself.

If you are a tenant who is in need of help or a landlord who is looking to surrender a lease, please get in contact with one of our commercial real estate lawyers. Here at Birkett Long, we also have a team of specialist Insolvency practitioners who are able to assist.  

I am based in the Colchester office and can be contacted on 01206 217389 or phoebe.trott@birkettlong.co.uk.