The negotiations are done, the lease is signed and in the process of registration when your tenant decides that he no longer wants to stay.  While this is not a particularly common situation, we have been asked about this recently, and the general principles also apply to assignments and surrenders of leases at any point during their terms. So, what can be done if this happens?

There are two main options to look at.  Firstly, and depending on the terms of the lease, your tenant can request your permission to assign (i.e. sell) his lease to a new tenant.  Normally in this situation, a commercial lease will prescribe the hoops that need to be jumped through, e.g. your approval as landlord of the new tenant, sorting out who will stand as guarantor to the incoming tenant, ensuring that arrears and previous breaches by the current tenant are dealt with. In some instances, if certain standard conditions are met, it is possible for a landlord to refuse its permission to an assignment. Residential leases with long terms can be slightly more relaxed, but do sometimes contain complex provisions governing incoming tenants, especially in smaller developments.  Often landlord’s consent will be required under these leases as well.

The other option is for the tenant to simply surrender the lease to the landlord, which has the effect, if done correctly, of extinguishing the lease and folding it back into the landlord’s freehold.  If the lease is for a short term or otherwise has little or no value, and there is no need to register the surrender with the land registry, this can be done simply by operation of law without the need for a formal document.  Often though, eg where a lease has a long unexpired term, or there are substantial arrears or breaches of lease covenants, it will be appropriate to document the transaction by way of a deed of surrender, and sometimes an agreement to surrender.  This is particularly important where a payment is being made either by the landlord or the tenant, or where there is a delay between agreement of terms and the actual date of surrender, eg because the lease is in the process of registration. 

Whether assigning or surrendering, where there is an issue preventing an immediate completion of the transaction, such as an unfinished registration as mentioned above, the parties can enter into a conditional agreement with completion subject to the registration of the lease being achieved to the acquiring party’s satisfaction within an agreed timeframe.

Other issues to bear in mind are -

VAT on premiums; if the landlord pays the tenant to surrender its lease, the supply made by the tenant is treated as exempt for VAT unless the tenant has opted to charge VAT on the land.  Reverse premiums (those paid by the tenant to the landlord) are treated similarly, ie the payment made by the tenant to the landlord is treated as exempt from VAT unless the landlord has opted to charge VAT on the land.

SDLT on premiums; premiums paid by the landlord to the tenant will generally oblige the landlord to pay SDLT, while reverse premiums will not incur a payment by either party.

Agreements to surrender; leases that benefit from the protection of the Landlord and Tenant Act 1954 must follow the same notification or statutory declaration procedure as the lease.  If this is not done, or done incorrectly, the agreement is void.