Jargon busting blog
Ever wondered what your adviser is talking about in relation to terminating a lease but reluctant to ask? A lease can be terminated in many different ways, some used more frequently than others. You may have heard various terms but not fully understood their meaning.
In summary, leases may terminate in the following ways:
Disclaimer occurs in cases of insolvency. A tenant’s liquidator or trustee in bankruptcy may disclaim a lease if it is considered to give rise to a liability to pay money or perform any onerous act or if the property is not readily saleable (pursuant to insolvency statute law). A disclaimer extinguishes the lease and releases the tenant from any further liability.
This is extremely rare. A lease granted for over 300 years, with at least 200 years to run, may be “enlarged” by a tenant into a freehold estate, under the Law of Property Act 1925 (section 153).
Exercising a “break clause”
Break clauses are usually found in leases of commercial (as opposed to residential) premises and provide for either party to determine the lease at one or more intervals before the expiry of the term (e.g. at 3 yearly intervals or at a fixed date).
Expiry of the term
A lease expires automatically when its term expires (i.e. a lease of a term of 4 years expires at the end of the 4 years from the start of the term) save in specific cases where a tenant has “security of tenure” (which will not be covered here).
The right to forfeit a lease in the event of a tenant’s breach of covenant is usually expressly provided for in the lease. The exercise of the right is generally subject to restrictions implied in the law (e.g. in the case of breach of repairing covenants in a commercial lease).
This is rare. A lease may be discharged by frustration. It occurs where the frustrating event brings about a sufficiently fundamental change in circumstances as to justify treating the lease as at an end.
Leasehold and enfranchisement
Certain statutory provisions enable a tenant to purchase the freehold reversion (and thereby merge the lease bringing it to an end). This is “leasehold enfranchisement” and arises under the Leasehold Reform Act 1967 (applicable to houses let as low rents for over 21 years) and other statutes.
If a tenant acquires the landlord’s freehold interest, the lease “merges” into the freehold and is extinguished.
Notice to quit
A periodic tenancy (as opposed to a lease for a fixed term) may be terminated by notice to quit served by either party. The notice must be served and provide for termination on a date at the end of one of those periods for which rent is payable. For example, a monthly periodic tenancy is terminable on one month’s notice. In residential premises there are additional statutory restrictions for the Notice to be enforceable.
This is rare. Where circumstances are extreme, the court may rule that a breach of a fundamental provision in a lease entitles the innocent party either landlord or tenant to the lease to treat the lease as terminated (in addition being able to sue for damages).
In some cases a specific statutory provision will operate to terminate a lease e.g. under certain laws relating to residential property.
A surrender can be by deed or be implied (by operation of law) for example by the tenant removing all their possessions and vacating the property and returning the keys to the landlord. Any surrender is only effective if it is accepted by the landlord. If not, the lease continues.
Of these various ways, simple expiry of the term is most common, in my view, closely followed by exercise of break options, notices to quit, surrenders by the tenant or forfeiture by the landlord.
I hope the above provides some insight into the terminology surrounding the termination of leases.
It is important as if you get this wrong as a tenant you may remain bound by the terms of the lease (including a liability to pay rent) when you wanted the lease to end and, on the other hand, as a landlord you may be stuck with a tenant you no longer wish to remain in the premises.
For advice about Commercial Property contact Liz Brady on 01227 76393.