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Relocating your business: what to do with your current lease

28 June 2022

There are often many circumstances which make it necessary to bring a lease to an end early. This may be because you need to move to bigger or smaller premises, or it’s no longer financially viable to operate your business from a premises. However, often your options are limited if your current lease still has some time to run. It’s important to understand the options available to you when trying to terminate or get out of your lease early. There is an increased risk to you if you don’t end your existing lease correctly.


Assigning the lease

An option is to assign the lease to someone else. Assigning the lease involves assigning your rights and obligations under the lease to a new tenant. The new tenant will become responsible for paying the rent and outgoings, etc. This can be a simple way to end a tenancy.

However, assigning a lease does not end the contractual relationship between you and the landlord. Unless agreed otherwise, the tenant and any guarantors under your lease will remain liable to the landlord should the new tenant breach the lease obligations. This liability usually extends until such time as the new tenant renews the term or varies the lease. If a breach occurs before the lease is renewed or varied, the Landlord can pursue the tenant and guarantors under your lease for the arrears, as well as any losses they may suffer.

In assigning the lease to a new tenant, you are effectively acting as guarantor for the new tenant.


Limiting your liability

To minimise the risk that you will be liable to the landlord for any subsequent tenant’s breach, you should consider the following:

  1. Limit your liability in the original lease agreement. When negotiating the terms of a new lease, you could include a clause that limits your liability should you assign the lease and the assignee defaults or breaches the terms of the lease. It’s important to note that once the lease is signed, it’s generally a lot harder to negotiate such clauses to be included in the lease. If you have already signed the current lease and it doesn’t include such a term, then one of the options below are more appropriate.
  2. Assign the lease near the end of the term. Where possible, consider timing your assignment as close as you can through the term of the lease. This way, the period of time that you remain liable for any obligations under the lease will be reduced.
  3. Novate the lease. Rather than assigning the lease, you could novate it instead. A novation ends the contract between you and the landlord and transfers all rights and obligations to the assignee, meaning you are no longer liable under the lease. However, the landlord would have to agree to the novation, and is under no obligation to do so (unless included as a term of the lease).
  4. Mutual agreement. You and your landlord could both agree to terminate the lease early. This would avoid the process of assigning or novating the lease to a third party. However, as with a novation your landlord is under no obligation to agree to end the lease early (unless included as a term of the lease).

Conclusion

There are many reasons to relocate your business or end your lease early. However, we recommend seeking legal advice to manage your risk if you are wanting to exit your current lease early. If you have any questions about your lease, please get in touch.

Odette Cottle and Conan Brolly are part of our Corporate & Commercial team at Norris Ward McKinnon.