Commercial property leases usually include an agreed end date, upon which the lease comes to a conclusion and must be renewed should all parties agree. However, some leases perform so poorly that it would be better to end the lease early.
Let’s look at how to assess your lease’s performance and your options for ending it early.
Assessing Lease Performance
Rent collection is perhaps the biggest indicator of a lease’s performance, as that will be the revenue generated by the commercial property and your tenants. The amount of rent received along with the timeliness of the tenant’s payments are the primary aspects to assess. The reasons for late payments and any disputes should also be investigated as they might reveal poor practices on your part.
If you have a large commercial property with multiple units, then the vacancy rate must be assessed as well. The reasons for a high vacancy rate must be ascertained, as it could be a supply and demand issue or a problem with your marketing, rent demands or facilities.
Also consider the renewal rates of your tenants, as well as tenant turnover and your net operating income. All of these considerations will reveal how well your lease is performing.
Ending a Lease Early With a Break Clause
Ideally, your lease should include a break clause which allows either the landlord or the tenant to end the lease early without facing any penalties. Break clauses should include a notice period agreed by both parties, plus other conditions may also be included.
Ending a Lease Early Without a Break Clause
Landlords can only end a commercial lease early without a break clause if the tenant fails to pay rent, or fails to meet any other lease obligations included in the agreement. Any agreements with particular obligations should include a forfeiture clause so the landlord can end the lease should the obligations not be met. However, it is possible for the tenant to challenge your decision in court, especially in matters unrelated to failed rent payments. In such cases, the tenant is often allowed to remain in the property until the court makes its ruling.
Tenants who want to end their lease early can come to an agreement with the landlord if they are open to it, a process sometimes referred to as ‘surrendering the lease’. Both parties will need to have all legal documents proving that such an agreement was made.Tenants can also pass the lease onto someone else with permission from the landlord.
Ending Fixed-Term Tenancies
A fixed-term tenancy means the lease automatically comes to an end when the term is up, although the tenant can continue as normal should the landlord agree. In such instances where a fixed-term lease has run its course but both parties agree to continue, the landlord is usually required to give six months notice should they want to end the lease.
If you need advice on ending a poorly performing lease early, then contact Brecker Grossmith today to speak to an experienced team of chartered surveyors specialising in commercial property in London.
