Business needs are being re-evaluated post-pandemic. The common theme is that the highest quality accommodation is the most in demand as businesses attract staff back to the office. But with a lack of supply in high quality Grade A space to meet this demand, some businesses are considering exiting their lease early to secure better accommodation when it becomes available, which is where a lease surrender comes in.

There are only limited options a business has to exit their existing office lease which include a break option (often on a five-yearly cycle), through using alienation rights, otherwise known as sub-letting or lease assignment, and a lease surrender.

There are two common routes for a lease surrender:

A speculative surrender Where tenant A approaches the landlord to end the lease before the termination date and without a new tenant lined up to take a new lease on the demise

A tripartite surrender Where tenant A markets the space and secures interest from tenant B; the surrender is conditional on tenant B agreeing a new lease with the landlord

In both scenarios the landlord has absolute discretion to refuse a surrender and therefore capital inducements are often paid by tenant A to the landlord to facilitate the transaction. Typically you will be required to pay a substantial amount of the remaining liabilities and in some cases, particularly in scenario 1, a landlord can request 100 per cent payment of remaining lease liabilities including dilapidations. There is often much more room for negotiation in scenario 2 as there is less inherent risk.

Leases often contain pre-determined surrender premiums or formulas for their calculation. This will help understand the payments to cover reinstatement of tenant’s fit out, decoration or dilapidations, as well as a calculation for outstanding rent, rates or service charges. 

In addition, there are tax implications to consider when documenting a surrender for businesses not registered for VAT. A surrender premium for the remaining operating expenses is VAT attributable; however, there is no VAT attributable for dilapidations.

Ensuring you get the financial modelling correct, including an accurate assumption for dilapidations, is vital to negotiate the correct premium with a landlord. However, intrinsic market knowledge is also advantageous in negotiation. Early preparation is essential and engaging with advisors early is vital to ensure a tenant’s successful surrender of the lease.

Further information

Contact Rob Pearson

In plain English: Exercising your options to determine your lease