A surrender of lease is where the tenant gives up their interest in the property to the landlord. If the tenant surrenders the lease, the landlord can re-take possession of the property. Surrendering a lease may require particular circumstances and steps to follow depending on the type of lease that was entered into. Find out if you have a retail or commercial lease.
Both parties must agree for the surrender to occur. The tenant will often have to negotiate with the landlord the terms of how it will be performed. It is this reason the tenant must approach the matter carefully because the landlord can refuse a surrender.
Obviously to surrender a lease, in a commercial setting, means that things haven’t gone to plan. This is naturally a stressful and upsetting time but it is important to approach it objectively and transparently.
Do I need to negotiate?
In short, yes. As the landlord must consent, a tenant should expect to pay a sum of money to the landlord to surrender. In negotiations, the landlord will be able to propose terms of the surrender and compensation is to be expected.
A landlord will ask for compensation because in surrendering the lease, they are giving up an income stream. Many leases are for long periods of time and are worth significant money. When the property becomes vacant, money will need to be spent on advertising and paperwork in finding a new tenant. In a more abstract point, the landlord has also incurred an opportunity cost in not leasing the property to another business. In short, the landlord ‘could’ve’ given the lease to someone else and not have to worry about this.
There are different ways to get a positive outcome in negotiating a surrender. This could include offering to help the landlord to find new tenants, or agreeing to stay until a new tenant is found. If you have a good relationship with your landlord then negotiations may not be an issue. If the relationship doesn’t allow constructive communication then it is better to have an agent or lawyer to perform the task.
Surrender Fee
Due to the associated costs of one party leaving the lease and the landlord having to seek another party take up the lease, the main issue for negotiation is the surrender fee. The calculation of the surrender fee in some leases may already be included and agreed to.
The cost of the surrender fee may save the tenant overall because the fee will be less than the rent for the rest of the lease term. The tenant could also with the landlord’s consent agree to appoint an agent to market the property for lease to a potential new tenant.
The NSW Land and Registry has a form for the tenant and landlord to fill out. An authorised person will need to sign the form. In addition to this, a deed of surrender will be required and the property certificate of title will need to be updated. If you need help, consider getting in touch with one of our commercial lawyers.
What If The Landlord Does Not Accept?
If the landlord it is not willing to consider an early surrender of the lease or provide you with a kind of relief, then there is also an option to try and sublease to a new tenant or transfer the lease to another party (also known as assigning the lease).
Surrendering a lease is often because a business has failed or failing. It is stressful and can be one of many issues a tenant will need. In some cases, engaging a lawyer or real estate agent to perform the negotiations can reduce stress and workload and also lead to a better outcome.
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