An overview of the various options for exiting a commercial lease and the practical considerations for both tenants and landlords.

Leases are legally binding contracts which govern the terms on which a landlord grants permission for a tenant to occupy its premises. Although the length of a commercial lease is a matter for negotiation, the majority of leases are granted for terms of several years, or longer. Therefore, what happens when the terms of a lease do not align with a tenant’s or landlord’s long-term plans? Whether due to restructuring, relocation or business need, a tenant may need to exit a lease before its contractual end date, or a landlord may wish to take the property back for an alternative use. The law provides several mechanisms to do so, each with its own legal and practical considerations.

For tenants, the most common routes to exit a lease are exercising a break clause, surrender by agreement, assignment and subletting. These options each afford a tenant varying degrees of separation from its original liabilities and have very different risk profiles. A further method of exiting a lease is by disclaimer, but we have not discussed that in this article as it is an option that would be utilised by an insolvency practitioner in a liquidation or bankruptcy scenario, not by the tenant itself.

For landlords, ending a lease can be more difficult, particularly where the tenant is not in breach of its obligations. The most common routes are surrender by agreement or exercising a break clause. However, if the tenant is in breach of its obligations, the landlord has alternative remedies which we cover in this article. These come with their own set of considerations.

Exercising a break clause

A break clause is a contractual provision allowing a specified party (the landlord, the tenant, or both, depending on the drafting) to terminate a lease early, usually on a specified date or during a defined period. Although this provides a fairly simple way to exit a lease, if a break right was not negotiated at the outset or the break date or period has passed, it will not be an available option (without a formal variation of the lease).

Break rights can be mutual or granted to one party only. Typically, there will be various conditions which must be strictly complied with for the break to be effective. When negotiating a lease, both landlords and tenants should consider whether a break right may be needed at some point in the future.

How it works

The lease will specify the required notice period and method of service (for example, by hand delivery or registered post). Common break conditions include:

• Payment of the annual rent and possibly all other sums due up to the break date (depending on the drafting)
• No outstanding breaches of covenant
• Vacating the premises and ensuring no third‑party occupiers or rights of occupation subsist
• Payment of a break premium
• In the case of a landlord break option, evidencing an intention to redevelop or occupy the premises

Failure to comply strictly with break conditions can invalidate the break notice, meaning the lease continues. Break clauses can offer flexibility but must be exercised with precision, otherwise the opportunity to terminate the lease may be lost.

Surrender by agreement

A surrender is the termination of a lease by agreement (express or implied) of the landlord and the tenant. It is often the most practical commercial route where both parties wish to end the lease early and no express break right exists. Surrenders can be effected formally by the parties entering into an express deed of surrender or informally by operation of law.

Surrender by deed is the most reliable and effective method to deal with a surrender. If a surrender is not mutually beneficial to both parties, it is likely to involve the payment of a premium by the party seeking early termination in order to persuade the other party to agree. A deed of surrender is signed by both parties and sets out any agreed conditions, such as the extent to which each party is released from their respective obligations (for example will the tenant remain liable for dilapidations?), payment of a premium, settlement of arrears and any dilapidations payment. A deed of surrender can be preceded by a prior agreement for surrender if the surrender is to be conditional on some other event (such as the tenant finding alternative premises) or is intended to take effect at a future date. 

The alternative to a deed of surrender is surrender by operation of law. This occurs where the conduct of both the landlord and the tenant unequivocally demonstrates an intention to treat the lease as at an end. For example, if a tenant returns the keys and vacates the property, and the landlord accepts the keys back and re-lets the premises without objection, this is likely to constitute a surrender by operation of law. However, this method is less certain and may lead to disputes if the requisite actions constituting the parties’ intention to surrender are ambiguous or not clearly documented.

Assignment of the lease

Assignment is another option available to a tenant where the landlord is not willing to agree a surrender and there are no break rights available. Assignment involves the tenant (assignor) transferring the lease to a third party (assignee). The assignee assumes all rights and obligations on the part of the tenant under the lease and takes occupation of the property, while the assignor is released from future direct liability under the lease. However, the assignor may be required to guarantee the assignee under an authorised guarantee agreement (AGA).

Whether or not assignment is an option will depend on the terms of the lease. If assignment is permitted, it is typically only allowed with landlord’s consent, such consent not to be unreasonably withheld or delayed and also subject to various requirements and conditions, which are usually outlined within the lease. As a common requirement is the provision of an AGA, it is important that the tenant considers the financial strength of a prospective assignee before agreeing to an assignment.

Subletting

Subletting is another potential option for tenants seeking flexibility without fully exiting their lease, where surrender or exercising a break are not available. It involves renting out part or all of the leased premises to a third party (the subtenant), while the tenant remains directly responsible to the landlord for compliance with its own lease (the headlease). Subletting can be useful where a tenant no longer needs to occupy the whole premises, but it comes with important legal considerations.

As with assignment, the availability of this option depends on the terms of the lease. Most leases will permit subletting of the whole premises with the landlord’s prior written consent (not to be unreasonably withheld), some leases will allow subletting of the whole but prohibit subletting of part, and some may prohibit it altogether. Even if permitted, the tenant must ensure the sublease complies with the terms of the headlease, including provisions relating to rent, assignment and underletting, use of the premises, security of tenure and duration. As the tenant remains liable to its landlord for the subtenant’s conduct, careful vetting and a well-drafted sublease are essential.

Landlord’s termination options 

Where a tenant is not in breach of its lease, the landlord’s ability to end a lease early is usually limited to exercising a break clause or agreeing a surrender. If no break right exists, a landlord must negotiate a surrender with the tenant and even if the tenant is open to this, it will likely want some form of compensation for having to leave the property earlier than expected. This is, ultimately, a commercial negotiation.

Final thoughts

Exiting a lease is possible, but it requires careful planning and legal awareness. Whether through surrender, assignment, subletting or operating a break clause, tenants and landlords must:

• Understand their lease terms
• Comply with legal and procedural requirements
• Seek professional advice where necessary

Each method offers a different balance of flexibility, risk, and control. By choosing the right approach and executing it properly, tenants and landlords can seek to exit leases smoothly and strategically.

The above is intended as a general overview of options for exiting a commercial lease. If you have any questions on the above or require advice in this area, please contact our real estate team.