Surrendering a commercial lease can be a stressful experience and a race of time. It is a complicated process as a successful surrender always involves a successful re-grant of a new lease to a replacement tenant.
1. What is Lease Surrender
Lease surrender takes place usually in commercial lease. It is a mutual agreement between the landlord and tenant to end a legally binding lease prematurely. The landlord will re-take possession of the property. It involves a series of steps before leading to the final signing of the deed of lease surrender.
2. Why Surrender
The process of lease surrendering is usually triggered by the tenant due to his own reasons such as the need to shed space or difficult in paying rent under sudden deterioration of economic conditions like the recent outbreak of Covid-2019 pandemic. However, most of these surrenders are due to something good than bad when a successful company requires more space for expansion or a relocation of operation to the office of its merged company after M&A.
For failing company with limited paid-up capital, they may rather choose to default the lease with all their security deposit being forfeited save that no personal guarantee is in place and all valuable equipment can be disposed and removed before losing control of the premises. However, it is certainly another story if the fixture and equipment are valuable to other tenants who may pay a price or a premium, to take up the place.
3. How to Surrender
Unless granted by any break clause in the lease agreement, lease surrender must be met with landlord’s agreement by at least compensating the landlord all the costs to be involved in re-renting the premises. As the cost and time of finding a new tenant are inestimable, a successful surrender usually comes with an equally-good-if-not-better replacement tenant brought by either the tenant or, in some but lesser cases, the landlord.
Landlord’s Resistant - If the premises in concern comes from a single ownership building, all surrender spaces in that building are basically competing stocks from the landlord’s point of view, hence usually met with uncooperative response during the process of surrender negotiation unless the tenant can bring with a renowned replacement tenant or the replacement tenant can pay an even better rent. Other than that, your or your agent’s negotiation techniques and relationship with the landlord may be the keys.
4. Break-even Point of Surrender
Time is matter to surrender. It is only justifiable to take up such stress job if the price paid for surrendering the place is less than your remained contractual obligations, that is, the total remaining rental, management fee, government rates and reinstatement cost. The cost of surrender includes:
- Agency Fee
- Marketing Cost
- Forfeiture of part or whole security deposit
- Rental subsidies (Rent free period given to the replacement tenant will also be converted into rental subsidies)
- Legal cost of executing the lease surrender deed
Therefore, the closer the natural lease expiry, the less would be the total cost of remaining contractual liabilities can be saved by lease surrender. Given a certain level of surrender cost, surrender will become meaningless beyond such breakeven point.
|Saving From Surrender|
|Monthly Occupation Cost:||$100,000|
|Agency Fee (2 months Rent):||$200,000|
|Rent Fee (2 months):||$250,000|
|Forfeiture of Security Deposit:||$300,000|
|Total Surrender Cost:||$1,250,000|
5. How to Find Replacement Tenant
As securing a replacement tenant on hand is crucial for any surrender negotiation and finding the right one is generally on the side of tenant’s responsibility, the tenant should inform the landlord and market the space to real estate agents as soon as the surrender decision has been made since any delay means paying more unnecessary rent and higher chance of falling beyond the aforesaid breakeven point.
Competitive Agency Fee
To win this time race, the tenant may consider paying higher agency fee for more motivation, as adopted by many landlords during economic downturn, given the fact that surrendering is a bit more complicated than dealing with a fresh lease case and competition from market alternative are fierce all the time.
For office surrender, the tenant generally has to pay the rent free in form of cash payable upon the signing of the surrender agreement, and in some cases may have to provide extra rental subsidies to the replacement tenant in order to make up the rental gap with the landlord’s expectation.
6. Deed of Lease Surrender
Upon reaching agreements amongst the landlord, the tenant and replacement tenant, the deed of lease surrender and a new tenancy, subject to the successful execution of the other, will be sign by the incoming and outgoing tenant respectively with the landlord. As the risk and consequences can be high, terms of the surrender are best settled by a deed prepared by a solicitor to avoid any legal challenge in the future. Proper registration to the required authority is also required.
7. Alternative Approaches
Though explicitly prohibited in most leases, tenant may try to seek for landlord’s approval on subletting part of their space to ease their contractual obligations. As the lease term of such sublease must not be longer than the parent lease, it is only feasible for tenant who has long remaining lease term.
Sale of Company Share
For small retail operation, lease surrender may take form of company share transfer or the sale of the whole company with a premium. As it is a change of shareholders of the company, no surrender agreement or new lease are required to create with the landlord. The buyer of the company inherits the existing lease. For retail leases involving portfolio landlord, however, there is always a clause in the tenancy that expressly grants to the landlord a right to terminate the lease within a specific period in case of a change of control of the tenant company. Therefore, tenant must review the tenancy before using this approach.
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