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March 2014

Property is an essential tool for any company in the life sciences sector.  As business needs change, you might need to acquire more space to accommodate growth and expansion, or to vacate space that is no longer required.  Whatever the reason for leaving your existing premises, it pays to know what your rights and obligations are before you cease to occupy or sign up for alternative premises.

How to bring your lease to an end

The options available to a tenant to bring its lease to an end during the term of the lease are quite different from those at the end of the term.

If your lease is coming to an end, and you wish to vacate all or part of the premises, you should seek advice on what you need to do. Ideally this will be 12 to 24 months before the expiry date, depending on the size of your operation, so that you can put yourself in the best possible position. This is important both for giving any notice that might be necessary and also for dealing with termination issues like vacant possession and dilapidations. 

Options available at the end of the term

Methods of bringing a lease to an end at contractual expiry vary depending upon whether the lease benefits from "security of tenure", which refers to a statutory right under the Landlord and Tenant Act 1954 ("the Act") to renew a lease at the end of the term. If you are not sure whether you have security of tenure, you should seek advice as to whether this applies to your lease.

A lease that is excluded from security of tenure will come to an end on the contractual expiry date.  There is no need for the tenant to give formal notice, but it must ensure that it has vacated in good time.  A tenant that remains in occupation after contractual expiry without the landlord's consent will do so unlawfully and is at risk of being locked out of the premises – with all its equipment and possessions on the inside.

Where the lease does have security of tenure the tenant can bring it to an end by either:

• Ceasing to occupy the premises for business purposes before the contractual expiry date; or
• Serving at least three months' prior notice on the landlord.

Options available during the term

A tenant may only terminate the lease during the term if the lease contains a break option. Not all leases include a break option as their inclusion in the lease is subject to negotiation between landlord and tenant when agreeing terms.

Serving a break notice to determine a lease can be tricky as there are often several things to get right. It is vital that the notice is served correctly. The Courts construe break notices and options very strictly, and many tenants have failed over what seems to be a minor issue.

Timing - Where a tenant wishes to exercise a break option, it is important to make sure that he is in time to do so. If the break option is "once and for all", meaning that there is a specific deadline for serving notice, that deadline must be met or else the tenant will lose the right to break completely and the lease will continue to the end of the term. If the break option is "rolling", the tenant must ensure that the timing is accurate. Should he fail to do so, he will have to serve a fresh notice, and will remain liable for rent and all other responsibilities in the meantime.

Service - Break options usually require a specific method of service. Sometimes the identity and address of the correct recipient can be quite difficult to establish, so great care must be taken when serving notice. This should always be undertaken by your legal adviser, as there may well be no second chances.

Pre-conditions - Break options are often drafted to be conditional upon performance of one or more pre-conditions, usually at the time of service of the notice, and/or by the break date itself. Examples can include:

• having to pay all rent and other sums due;
• providing vacant possession;
• having performed or materially performed all of the tenant's covenants in the lease (which will be very difficult to achieve, and it is vital that advice is sought at the outset); or
• having to pay a break penalty payment.

Failure to comply with any pre-condition will mean that the break notice does not take effect, and the tenant remains on the hook. Again, early preparation is key, and tenants wishing to exercise a break option should ideally seek advice on the requirements of the lease 12 to 24 months before serving a break notice.

Surrender - If the lease does not contain a break option, it can only be terminated early if the landlord is in agreement with this. This is known as a surrender. It can either be documented in writing, or it can be inferred from the conduct of the landlord and the tenant by "operation of law". If the landlord is happy to take the premises back then a surrender is a good way to bring the lease to an end.

However if the landlord does not want to take back possession of the premises (for example where he will not be able to re-let) then he cannot be compelled to do so. If the landlord refuses to take a surrender, the lease will have to remain in place. Alternatively, the landlord may seek payment of a surrender premium.

Other options

If a tenant needs to vacate its premises where there is no break option in the lease, and the landlord will not agree to a surrender, it may still be able to assign the lease to a third party, or to take on a subtenant. This can be a very good way to minimise outgoings, but advice should be sought on the requirements of the lease and the landlord before entering into any agreements.

Things to consider when terminating leases

Dilapidations and reinstatement

Unless the landlord is carrying out a major refurbishment or has found a new tenant to take on the works, he will look to the tenant to put the property in repair at the end of the term. This is referred to as a dilapidations claim. The landlord may also require the tenant to carry out reinstatement works in respect of any alterations carried out during its occupation. This may be particularly important for tenants in the life sciences sector, which can have very bespoke requirements.

Generally a tenant is required to carry out the works necessary to put the premises back into the standard of repair envisaged by the lease. This would involve the tenant carrying out works of repair during the last few months of the term of the lease, which in most cases will interfere with their business. After the term has expired the tenant will have no rights of occupation to carry out repair works (unless granted licence to do so by the landlord).

However, many tenants prefer not to carry out the works themselves. If the tenant chooses not to do the works, or does not do all the works that the landlord considers are outstanding, the landlord will usually claim the costs as damages, together with loss of rent for the period that it takes to carry out the works required.

Quite often a landlord and its tenant will come to a financial agreement over the dilapidations claim so that the tenant does not have to carry out the works. As before, early preparation is essential, so that the tenant can put itself in a strong negotiating position. Advice should be sought from a solicitor and a building surveyor some 12 to 24 months before the expiry of the lease, so that there is plenty of time to do the works if this is the best option for the tenant.

Conclusion

There are several things to consider and often more than one option available to a tenant wishing to bring its lease to an end. This article provides a brief summary of the issues that should be taken into account when planning an exit strategy, however each case will involve different facts and we would always recommend taking advice at an early stage before any action is taken.

If you have any questions on this article or would like to propose a subject to be addressed by Synapse please contact us.

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