If you are a tenant approaching the end of your lease, or considering terminating early, there are some key points you should consider to ensure that your exit is well planned and budgeted for.
1. Understand the extent of your repairing obligations
When it comes to understanding your repairing obligations, possible exposure can be as long as a piece of string. Here are some things to check which may help you quantify your potential dilapidations liabilities:
Check the extent of your demise: If your lease is for the whole building potential repair liability is likely to be more costly than if you have an internal only demise and may include liability for repairing conduits, such as pipes and wires, and responsibility for ensuring these are certified as statutory compliant. Factor in any areas you occupy under ancillary agreements, such as outside seating areas or storage units.
Check what standard you are expected to repair to: Leases which require you to “put” or “keep” in repair or condition can often mean having to put the property into a better condition than it was in at the date of lease grant. Occasionally a tenant may have responsibility to “renew” or “rebuild” where the property is damaged or destroyed – which clearly goes far beyond what would be expected.
Engage in early negotiations with the landlord: Find out the landlord’s plans for the property and take early legal and surveying advice. If the landlord is planning to demolish or substantially redevelop the property, or immediately re-let to a tenant who plans to carry out substantial fit out or redevelopment works, then this may effectively reduce the tenant’s repair liability.
Alternatively, if a big dilapidations bill is expected, and a tenant is flexible with their property plans, then it may be more cost effective to seek to renew the lease for a short period to roll repairing liabilities over to be progressed when cash flow is convenient. Establishing a dialogue with the landlord early on can help shape a plan of action to deal with dilapidations.
2. Know what else is required of you upon yield up
You should check your yielding up clause in your lease carefully to ensure compliance and check:
Is there an obligation to reinstate any alterations carried out during the term of the lease? It is relatively uncommon for a lease not to require reinstatement of alterations. The exception is usually where a tenant has taken on a lease of a building in a fairly dilapidated state and carrying out repair, improvement or modernisation works as part of its fit out. In this case the landlord is likely to want such works to remain in situ and the tenant may even may able to claim compensation for the work. Review the reinstatement clause carefully to see what trigger mechanisms are specified and any relevant timings which apply.
What is the scope of any reinstatement obligation? A tenant will usually know what alterations it has carried out at the property, unless it has taken an assignment of a lease – when it may not have copies of every licence for alterations to refer back to in the absence of any schedule of condition. Where a tenant holds the property under a renewed or reversionary lease it may be necessary to reinstate to the condition the property was in at the date of grant of the original lease. Bear in mind that reinstatement does not simply mean “stripping out” ay alterations which exist, but also making good any damage caused in the process.
What does an obligation to provide “vacant possession” actually mean? This is not as straightforward as it first appears. For vacant possession a tenant must usually do more than simply vacate the property and hand back keys. Strictly speaking it involves removing any possible barrier to the landlord re-letting the property. This can include reinstatement of alterations and making good, removal of rubbish and termination of all subsisting underleases/occupational arrangements. Early legal advice should be sought in particular if you have exercised a break right under the lease (which may not be valid if vacant possession is not provided on the break date), and/or if any underlease has been granted with security of tenure (as this will potentially be an obstacle to the requirement to provide vacant possession).
Are you required to make any payments in order to exit the property? If a break right requires payments of all rents up to date and/or a penalty payment to be paid for exercising the break right, then you will need to ensure such payment is made by the required time. Remember that funds must be paid by the method stipulated by the lease and have arrived in cleared funds in the landlord’s account by the specified date. Do not try to apportion any final payment of rents unless the lease is very clear that this is permissible. Courts take a hard line when it comes to complying with break conditions and, consequently, tenant’s can find the smallest of errors costing them their ability to exit their lease early.
3. Consider any continuing obligations post lease end
You should anticipate and plan for a number of “loose ends” to be tied up after lease expiry.
Check where you stand in relation to ongoing liabilities. Don’t assume that termination of a lease means a clean slate. Unless you have entered into a deed of surrender which clearly provides for a release of liabilities, both parties remain liable to the other for any pre-existing breaches for the standard contractual limitation period of 6 years from the date of the alleged lease breach. If you have been served with any notices of breach of covenant by the landlord, then your liability should be expected to overhang lease termination. Remember that a dilapidations schedule is likely to follow post lease expiry (within 56 days if the landlord is adopting pre-action protocol procedure) so you will need to budget for the likely cost of this (bearing in mind the extent of your repairing obligations under the lease as mentioned above).
Are there any outstanding rent reviews? Bear in mind that any rent reviews which are still outstanding may remain “live” post lease expiry, so the new rent may still be determined post termination, and any arrears of back rent recovered by the landlord. Where the tenant has an opportunity to do so, a memorandum recording a nil increase for any outstanding rent (or at least a cap on any uplift formally documented) is advisable prior to lease expiry. If you are terminating your lease in exercise of your break right, then you will need to consider carefully how rent reviews interact with the break dates, timings for serving notices and conditions.
Do any rent payments need to be reconciled or deposits returned? If your lease terminates part way through a rent payment period then check your lease carefully to see whether there is an apportionment of rents clause which will entitle you to a pro-rata refund. Where service charge schemes operate there may also be either a balancing credit or debit owed to one party. If you are not exiting your lease in arrears of any rent, then expect any rent deposit to be returned (potentially with interest). Any works security deposit should also be returned.
With so many potential issues and liabilities to navigate on lease termination our experienced team at Freeths can help you achieve an elegant and well managed lease exit
