Landlords and tenants within the retail, hospitality, and leisure sectors continually have to adapt their portfolios and business on account of market pressures; for landlords, that may involve terminating commercial tenancies to carry out redevelopment work.

That work may involve adapting workplaces for hybrid working and attracting tenants back into the office.

Landlords will also want to recover possession of premises from difficult tenants, replacing them with occupiers with improved covenant strength.

In recent times, the increase in the cost of living and inflation has meant that many businesses within the hospitality and leisure sector have found it difficult to trade and pay rent; therefore, the possibility of terminating their lease is particularly attractive.

Tenants are also frequently assessing their business needs in terms of property. In recent times, retail tenants, in particular, have been looking to reduce their high-street portfolios.

Hybrid working has also resulted in professional services tenants requiring reduced floor areas, meaning that termination of existing tenancies is at the forefront of their minds.

So how do landlords and tenants go about terminating commercial tenancies? We've summarised the most common options below.

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Method
End of lease term – lease contracted out of the Landlord and Tenant Act 1954 The tenant's right to remain in the property will end after the contractual term expires. After the lease expiry, the landlord can change the locks at the property.
End of lease term – lease protected by the Landlord and Tenant Act 1954

If the tenant is in occupation for the purpose of a business, the tenant will have a statutory right to remain in the property after the contractual expiry date until the lease is terminated by one of the methods set out under the 1954 Act:

  • Landlord is prepared to grant a new lease to the tenant: must serve an unopposed s.25 notice specifying the terms of the new lease.
  • Landlord requires possession of the property: must serve an opposed s.25 notice specifying one of the seven statutory grounds of opposition. Frequently used grounds of opposition are grounds of redevelopment or landlord reoccupation. Landlord will need to provide evidence of this ground if they can successfully obtain a termination order from the court.

s.25 notices must give not less than six months and not more than 12 months' notice.
Notice to quit

A tenancy with no fixed term is known as a "periodic tenancy". To terminate a periodic tenancy, a party must serve a notice to quit giving one period's notice (by reference to the rental period) expiring the day before the end of a period.

A periodic tenancy may have the protection of the Landlord and Tenant Act 1954, in which case the landlord must also serve a s.25 notice in accordance with that Act.
Break notice

The lease may contain a contractual right to terminate the lease before the contractual expiry date.

Termination can usually only be achieved by giving a certain amount of written notice (as specified in the lease).

If the lease is protected by the Landlord and Tenant Act 1954, the landlord must also serve an opposed s.25 notice specifying a statutory ground of opposition.
Forfeiture

If the lease contains an express right to forfeit, a landlord can forfeit the lease where the tenant breaches any of the lease provisions.

If the breach is a failure to pay rent, the landlord can forfeit by peaceable re-entry (changing the locks) or by issuing court proceedings.

For any other breach, a landlord must first serve a s.146 notice specifying the breach. If the breach is remediable (such as a breach of the repairing covenants), the notice must also give a reasonable time to remedy the breach.

On the expiry of the notice period, the landlord can forfeit by peaceable re-entry or by court proceedings.

Landlords should be aware that a tenant may apply for "relief from forfeiture", for example, when they have paid the outstanding rent.
Surrender

If both parties agree to the termination of the lease, this constitutes a surrender.

A surrender can be expressed, where the parties document the surrender by deed or by "operation of law", where the tenant returns the keys, and the landlord accepts those keys.


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Tenants' methods of termination

Method
End of lease term – lease contracted out of the Landlord and Tenant Act 1954 A lease contracted out of the Landlord and Tenant Act 1954 will terminate on the contractual expiry date. The tenant will have no right to remain in the property after this date.
End of lease term – lease protected by the Landlord and Tenant Act 1954

If a tenant is in occupation for the purpose of a business, the tenant will have a statutory right to remain in the property after the contractual expiry date until the lease is terminated by one of the methods set out under the 1954 Act:

  • Tenant serves a s.26 request terminating the existing tenancy and requesting a new tenancy. The notice must give not less than six months and not more than 12 months' notice and specify the proposed terms for the new tenancy.
  • Tenant serves a s.27(1) giving at least three months' notice to expire on the contractual expiry date. The lease will then end on the contractual expiry date.
  • In circumstances where the contractual expiry date has passed, the tenant serves s.27(2) notice giving at least three months' notice to terminate.
Notice to quit

A tenancy with no fixed term is known as a "periodic tenancy". To terminate a periodic tenancy, a party must serve a notice to quit giving one period's notice (by reference to the rental period) expiring the day before the end of a period.

A periodic tenancy may have the protection of the Landlord and Tenant Act 1954, in which case the landlord must also serve a s.25 notice in accordance with that Act (as set out above). However, a tenant cannot serve a s.26 request as a periodic tenant.
Break notice

A lease may contain a contractual right to terminate the lease before the contractual expiry date.

Termination can usually only be achieved on giving a certain amount of written notice (as specified in the lease).

The termination may be subject to various break conditions, such as payment of rent and compliance with certain covenants. A failure to comply with the break conditions will render the break notice invalid, meaning that the lease will continue for the remainder of the term.
Surrender

If both parties agree to the termination of the lease, this constitutes a surrender.

A surrender can be express, where the parties document the surrender by deed or by "operation of law", where the tenant returns the keys, and the landlord accepts those keys.
Disclaimer

Where a tenant is wound up or made bankrupt, and the liquidator or trustee considers the lease to be a burden rather than an asset to be realised, he may give notice to disclaim the tenancy.


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