There are various ways in which a lease can end. The appropriate method of termination depends on several factors including whether the lease has the protection of the Landlord and Tenant Act 1954, which party wants to bring it to an end, whether the lease is coming to its contractual end or one party wants to get out of it early, and whether the tenant is in breach of any of the lease terms. This note provides an overview of the most common ways in which a lease may end and highlights some of the key considerations.
Business Tenancies – Landlord and Tenant Act 1954 (the “Act”)
The Act offers protection to business tenants when the contractual term of a lease is ending, though the landlord and tenant may contract out of the Act if they wish. This protection gives the tenant a right to remain in occupation of the property and to take a new lease at a market rent. Unless the parties have contracted out before the lease is granted, a protected lease will automatically continue after the contractual termination date. If either party wishes to bring the lease to an end they need to follow a specific procedure.
Termination by the tenant
If the tenant doesn’t want the lease to continue beyond the contractual termination date he can either:
- Simply vacate by the contractual expiry date; or
- Serve a s27(1) notice of his intention to vacate on the landlord, giving at least three months’ notice
In either case, the lease will end on the contractual termination date and the tenant will have no further liability.
If the contractual termination date has already passed and the tenant decides that he wants the lease to end, he must serve a s27(2) notice giving at least three months’ notice of termination.
Termination by the landlord
A landlord is only able to terminate a protected tenancy if he can prove one of certain limited grounds for termination. The landlord must serve a s25 notice on the tenant specifying a termination date which cannot be before the contractual termination date and must give between 6 and 12 months’ notice. The landlord must specify which grounds he is relying on.
If the tenant has already requested a new tenancy (using a s26 request) and the landlord does not want to grant this, he must serve a counter notice within two months of receiving the s26 request, setting out the grounds of opposition upon which he is relying.
There are seven grounds that the landlord can rely on: (a) That the tenant has failed to maintain or repair the property (b) That the tenant has persistently delayed in paying rent (c) That there are substantial breaches of obligations under the lease or objections to how the tenant uses or manages the property (d) The landlord can offer suitable alternative accommodation (e) There are complex subtenancies and the landlord can obtain a better rental return if he lets the property as a large unit (f) The landlord intends to demolish or reconstruct the property, or carry out substantial construction work and could not reasonably do so without obtaining possession – this is the most commonly used ground (g) The landlord intends to occupy for his own business purposes – he must have owned the property for five years before this ground applies unless the tenant agrees to vacate, it is up to the court to decide whether the landlord has proved the grounds. If the landlord can prove only “no-fault” grounds ((e), (f) or (g)) then the tenant is entitled to compensation (set at one times rateable value, or two times if the business has been carried on at the property for at least 14 years).
Effluxion of time – fixed term contracted out tenancy
A lease which is granted for a fixed term, and does not have statutory protection, expires when the term ends. It does so automatically and without notice. At the end of the term, the tenant must give up possession of the property. This includes vacating the property and making sure that any subtenant vacates.
If the tenant fails to vacate the property then, in the absence of any formal agreement, the basis on which he occupies will depend on the circumstances and conduct of the parties. Unregularized occupation can have unintended consequences for the parties.
To avoid the uncertainty that comes at the contractual lease end it is advisable for the landlord or his managing agents to contact the tenant at least six months prior to lease expiry to ascertain his plans. If the tenant indicates that he would like to stay, negotiations should begin for a new lease with the intention that this will be in place by the time the old lease ends. If a few weeks before lease expiry it still isn’t known whether the tenant is staying or leaving, or a new lease will not be completed on time, then the best practice is for the landlord to send an open letter demanding possession of the property upon lease expiry and to consider putting a rent stop in place to ensure that no rent is demanded or collected after the lease has expired (to avoid a periodic tenancy arising).
A break clause is a right for the landlord, tenant or both to end the lease early before the fixed term expires. A break may be unconditional but is more often subject to conditions set out in the lease. Break clauses are strictly construed which means it is essential that the party wishing to exercise the break does exactly what the lease says. You should always take legal advice before exercising a break.
Exercising a break right
The first thing to establish is when the break may be exercised: some leases will give a rolling break (eg on six months’ notice at any time) but it is more common to see a break which allows the lease to be ended only on one or more specified dates.
Care must also be taken with service of the break notice. Everything that the lease says about the notice must be exactly followed, including how much notice must be given, the format of the notice, who may sign the notice and how the notice may be validly sent to the other party.
Some break clauses (particularly tenant’s breaks) are conditional on certain things having been done. These usually need to have been done at the break date but some leases require that conditions also be fulfilled at the date on which notice is given – this should be checked carefully.
It is common to see the following conditions in a tenant’s break right:
- A requirement that rent due be paid up to date – this may include sums in dispute and rent relating to a period after the lease will have ended where payment falls due prior to lease end.
- A requirement that the tenant gives vacant possession – this means that the tenant needs to make sure that the property is empty of all people and any goods or alterations (such as significant partitioning) which prevent or interfere with the landlord taking possession. If there are subleases in place the tenant needs to ensure that these have been terminated and the subtenants have fully vacated.
- A general condition that the tenant is in compliance with all its covenants – this is very difficult for a tenant to comply with as there will nearly always be a minor breach of eg the repair or decoration covenant. As a tenant, if you have a clause of this kind, it is advisable to try and engage the landlord to agree well in advance as to exactly what needs to be done to comply. However, a landlord is under no obligation to do this and if he does not want the lease to end is unlikely to agree. In this situation, the tenant will need to carry out his own survey to ascertain exactly what work needs to be carried out and then ensure that this work has been done before the break date.
The surrender of a lease is an agreement between the landlord and the tenant that the lease will end early. A surrender is not effective unless it is accepted by the landlord.
A surrender may be express (in which case it must be made by deed and take effect immediately) or it may take place by operation of law (eg the tenant gives the keys back and the landlord accepts them, knowing that the tenant is bringing the lease to an end). It is possible to enter into an agreement to surrender the lease at a future date but if the lease has 1954 Act protection then the surrender agreement must be contracted out.
When a lease is surrendered, the term ends and the landlord has the right to possession of the property. Both parties are released from future covenants but remain liable for past breaches, unless the surrender deed provides a full release. It is worth noting that any subtenancies which had been granted out of the surrendered lease do not fall away: the landlord simply becomes the direct landlord on the terms of the subtenancy. Landlords should therefore make sure that they are aware of any subtenancies that are in place before they agree to take surrender.
Forfeiture – the right of re-entry
A “right of re-entry”, or “forfeiture right” is a landlord’s unilateral right to bring a lease to an end in the event of a breach by the tenant. Ordinarily, a lease will contain an express right for the landlord to forfeit in defined circumstances. If the lease does not contain this right the landlord may still be able to forfeit for some breaches, but this will need to be carefully checked. If a lease is successfully forfeit all interests created out of it will fall away, including those of any subtenants or mortgagees, subject to any relief that they might claim.
The forfeiture procedure to be followed depends on whether the landlord is forfeiting for non-payment of rent or some other breach of covenant. Where the breach is non-payment of rent, the lease will usually provide that the right to re-enter arises a fixed period (eg 21 days) after the rent fell due. If the rent has not been paid at the end of this time, then the landlord doesn’t need to give the tenant any notice of his intention to forfeit – he can immediately do so either by issuing court proceedings seeking possession (and the arrears of rent) or by peaceably re-entering the premises (usually employing a bailiff).
Where the breach is of some other covenant, the landlord may only exercise the right to forfeit after he has served a s146 notice on the tenant, giving the tenant an opportunity to remedy the breach and a reasonable time in which to do so. Where the breach is of a repairing covenant and the lease was originally for a term of seven years or more with at least three years still to run, the s146 notice needs to include additional provisions which allow the tenant to serve a counter-notice forcing the landlord to obtain the leave of the court before he can forfeit.
It is important for the landlord to understand that as soon as he becomes aware of a breach of covenant occurring, he must decide then whether to determine the lease or allow it to continue. Once the landlord is on notice of an act or omission that would permit him to determine the lease he must ensure he does nothing to waive the breach on which he may want to rely.
As forfeiture is a form of penalty, the courts lean against it and will often grant relief if requested. An application for relief may be made by the tenant, his mortgagee or any subtenant. Where the forfeiture was for non-payment of rent, relief will automatically be granted where the tenant pays all arears due and all costs of the action; for other breaches, relief will be at the discretion of the court but will usually be granted if the tenant has either remedied the breach or promises to do so within a specified period. If relief is granted it is as if the lease had never been forfeit.
When a tenant has gone into insolvent liquidation, the liquidator can disclaim the tenant’s liability under a lease. This ends all the insolvent tenant’s rights, interests and liabilities in the lease. The liquidator must follow the specified procedure, giving notice to everyone that requires it. Generally speaking, a liquidator can disclaim at any time. However, a landlord can force a decision by serving a “notice to elect” on the liquidator. This gives the liquidator 28 days to disclaim, or he loses his right to do so.
Provided that the landlord does not take back possession of the disclaimed property, the disclaimer only brings the tenant’s liability to an end: it does not end the lease itself, meaning that the rights and liabilities of guarantors and former tenants continue.
The position with regard to subleases is complex; in essence, the subtenant can remain in possession for the term of the sublease as long as he pays the headlease rent and complies with the headlease covenants. This will often be a more onerous liability. Although the terms of the headlease are not directly enforceable against the subtenant, the landlord can forfeit for any breach of these. The subtenant has no ongoing obligation under the terms of the sublease as from the date of the disclaimer, so if he wishes to leave the property he can.
To tidy up the messy situation that exists following disclaimer, a subtenant (or other entitled party such as a guarantor) can apply for a vesting order, meaning that the applicant becomes the tenant under the lease. The landlord is also able to apply to vest the lease in one of these parties and if they decline then their rights, interest and liability in respect of the property will end.
What happens when the lease ends? Recovery of possession
If the tenant remains in occupation of the property once the lease has ended he becomes a trespasser and the landlord can take action to recover possession. The easiest way to do this is by entering the property and changing the locks when the property is vacant but this needs to be done carefully so as to avoid criminal liability. Alternatively, the landlord can apply to court for a possession order. This usually takes around 6-8 weeks and if the tenant still refuses to leave the landlord can get the bailiffs (and ultimately the police) involved.
Damages for continued occupation
If a tenant remains in occupation as a trespasser the landlord can claim damages. Which is usually a sum equivalent to the ordinary letting value of the property, together with other losses that the landlord has suffered as a result of the trespass.
Most leases contain an express obligation on the tenant to return the property to the landlord in compliance with the covenants in the lease. The main clauses to check are those relating to repair, decoration, alterations and signage. The obligation will usually state that the tenant must give “vacant possession” and allow the landlord to recover his costs in respect of removing anything which the tenant leaves behind.
Property which the tenant brings on to the premises may be a landlord’s fixture, a tenant’s fixture or a chattel, which is usually determined by how much the item has become part of the building. The general principle is that a tenant cannot remove the landlord’s fixtures at the end of the term, has the option of removing tenant’s fixtures and must remove chattels. However, this principle can be modified by agreement between the parties, so the tenant can contractually be required to leave or remove any items, regardless of the nature of them. The lease should therefore be reviewed carefully to check what cannot, may and must be removed.
The tenant should take great care in ensuring that he complies with any reinstatement obligations in the lease or in any licence for alterations granted during the term of the lease. There may be an absolute obligation on the tenant to reinstate or it may only be necessary if requested by the landlord. Failure to reinstate is likely to lead to a claim for damages.
Most leases contain express covenants in respect of decoration and repair. At the end of the lease, the landlord can make a claim for damages for disrepair. If the landlord is intending to alter or demolish the property this may significantly reduce the amount that he can claim.