Surrendering a commercial lease-some important considerations

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rent-review-commercial leases

When a tenant is in difficulty and arrears or rent have arisen with his lease it is sometimes the smartest move for the tenant to surrender the lease, and for the landlord to accept the surrender.

This involves the tenant handing back the lease and the premises to the landlord on the basis that he will have no further obligations in respect of that lease. It is open to the landlord to only accept the surrender provided all arrears are discharged up to the date of surrender.

The circumstances will determine if this is a realistic stance to adopt, or not, because if the tenant is insolvent or bankrupt there is no point in the landlord playing hardball and holding out for money he will never receive.

Once the lease is surrendered the landlord cannot pursue any rent he would have been entitled to for the remainder of the term of the lease. However, if there is a liquidator involved the landlord may only accept the surrender provided he can claim for loss of future rent.

Alternatively, a liquidator appointed to the business of the tenant may occupy the premises for the remainder of the liquidation process. The liquidator will then be liable for the rent and this is considered an expense of the liquidation from the date of appointment of the liquidator. This rent would rank in priority as to creditors in the liquidation and the landlord is entitled to the full amount of rent.

A liquidator has a year in which to decide what to do about the lease.

However, the landlord can write to the liquidator asking him if he is going to disclaim the lease or not. The liquidator must give notice of his intention to disclaim within 28 days or he will lose the right to disclaim. This usually encourages the liquidator to negotiate to surrender the lease back to the landlord.

If there is no agreement as to surrender and the lease is disclaimed the liquidator is liable for all outstanding rent arrears and can be sued for damages for loss of future rent. This is calculated on the basis of the rent the landlord would have received under the lease, but for the disclaimer, and the rent he is likely to get for the remainder of the term.

The net present value of this sum must be calculated to recognise that the landlord is getting a present sum of money instead of a flow of income in the future. However, in a winding up of the company the debt arising from these damages may be written down heavily in the liquidation and only a fraction of the outstanding sum may be paid.

Guarantor

What about the guarantor of a lease when a liquidator disclaims a lease? The guarantor is still on the hook for the rent or the landlord can require the guarantor to take the lease for the residue of the term. This might prove a better option for the landlord rather than relying on making a claim in the liquidation.

Conclusion

You will note that there is a number of factors to consider before you surrender, or accept a surrender of, a lease. It is easy to blunder into a rushed decision without knowing or ascertaining all the ramifications.

Get legal advice if you are the landlord or tenant in this situation.