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Terminating a Lease Early: Deeds of Surrender

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Morgan Gilbert, Trainee Solicitor | 24th August 2023

In most cases when a landlord and tenant enter into a lease, the lease term will be for a specified period of time. A lease cannot be terminated early by a tenant unless it includes a break clause. However, even where a break clause is included, it can only be exercised at certain times and only when certain conditions have been met. An alternative to a break clause is for a landlord and tenant to agree to enter into a deed of surrender, effectively terminating the lease early by mutual agreement.

The deed itself will detail the obligations that need to be fulfilled by both parties.

Neither party is obliged to enter into a deed of surrender, but it can be negotiated if each party recognises that their commercial interests have changed. For example, a landlord may agree to a surrender because they know a tenant cannot pay rent; this may allow a landlord to find a new solvent tenant, rather than fruitlessly demanding payment from an insolvent tenant.

Key Considerations for Landlords

Prior to agreeing a deed of surrender with a Tenant, Landlords should be aware that by entering into a surrender they are potentially receiving the benefit of a chargeable interest in land which could attract SDLT liability.

If the tenant pays the landlord to accept the surrender of the lease (known as a reverse premium), no SDLT liability arises for either the landlord or the tenant.

When negotiating a deed of surrender, the Landlord will want to ensure that the surrender is only valid if the Tenant has complied with certain obligations. These may include but are not limited to, the:

  • Payment of rent arrears
  • Payment of service charge arrears
  • Decoration and repair of the leased property
  • Obligation to close the title at the Land Registry

Equally, the tenant will want to ensure that as many of the following terms are included within the surrender;

  • Any overpayment of rent is returned.
  • Any overpayment of service charge is returned.

Legal Protection – ‘Drop Hands Agreement’

A deed of surrender will almost always be a ‘drop hands agreement’ meaning that both parties agree not to make any claims against the other for non-performance under the lease. It is therefore important to ensure that all the relevant terms are included within a deed of surrender.

Once negotiations have been finalised and the deed has been drafted the document should then be circulated to the Landlord and Tenant to execute, completion will take place once the deed has been properly signed, witnessed and dated subject to the conditions mentioned within it. In most cases, the Tenant will then be required to vacate the property and will have no further interest or liability under the lease.

Drafting for Success: Importance of Accurate Deeds of Surrender

It is essential to ensure that the deed of surrender is drafted correctly so that it adequately reflects the intentions of both parties and limits liability as much as is possible.

If you are looking for help or support with deeds of surrender, please get in touch with our experienced Commercial Property Department on 01752 388883.