The risks of surrendering?

How should local authorities go about surrendering leases? Phil Lawrence sets out some top tips.

The goal for those tasked with managing public sector property at the moment is to ensure that the best possible value is generated. There exists a number of challenges to this. The Report from the National Audit Office Improving the Efficiency of Central Government Office Property, March 2012 - HC1826 (the "NAO Report") made interesting reading on the attempts to reduce the costs of the Central Civil Estate.

The public sector is not only the biggest single owner of real estate but also the largest tenant in the UK. The NAO Report indicated that public bodies were experiencing difficulties in surrendering (i.e. handing back) leasehold buildings to achieve savings or reduce surplus space.

There are many possible reasons for this, including the currently weak commercial property market. However, this does mean that where an opportunity to surrender a lease is identified, it is more important than ever that the lease surrender transaction goes through as smoothly as possible.

Accordingly, we have the following top tips on the legal aspects of surrendering leases:

Deal structure

A contract, known as an agreement to surrender, can be used to fix the future date of the lease surrender. The surrender will then be contained in an express deed known as a deed of surrender. It is also possible to go straight to the deed of surrender. It is worth deciding early if a split between the agreement date and the actual date of surrender is needed (for instance to move or relocate staff). This can also make a difference to the Landlord & Tenant Act 1954 procedure required.

Legal due diligence

A lease surrender will require some legal investigation. This may be to identify if there are any occupiers or underleases that need to be ended, to allow the surrender to go ahead. It will also be necessary to identify if there are any third party consents required. For instance, there may be a mortgage on the landlord's legal title that contains a restriction. This can be relevant for registered leases where a Land Registry application to remove the reference to the lease is necessary. 

Clean break

The terms of the surrender need to be considered. A deed of surrender can provide for a clean break (i.e. a full release between the landlord and tenant). Alternatively, a deed of surrender may also be worded to leave liability open as to any existing breach of the lease (i.e. one that has occurred before the date of the surrender). This could be relevant to any number of existing liabilities including dilapidations liability. Careful consideration as to what is being released is needed by all parties.

Payments

The main benefit of a deed of surrender for a tenant is to release it from future liability for rent. However, this can mean a landlord will seek a surrender premium for accepting the surrender. Early valuation advice on this aspect may be required. Consideration should also be given to any need to apportion rents, which are often paid quarterly in advance. For leases that are subject to service charge, consideration will also be needed if there is to be a balancing payment or if any refund may be due.

Phil Lawrence is an Associate at Veale Wasbrough Vizards. He can be contacted on 0117 314 5441 or by This email address is being protected from spambots. You need JavaScript enabled to view it..