There are various mechanisms for terminating a commercial or business lease during its term:

1)    Surrender (either express or by operation of law); 
2)    Forfeiture; 
3)    Break clauses.   

Break clauses   

A break clause is one that allows a landlord and/or a tenant to end a lease before the expiration of the fixed term, often at a particular point in the lease or upon the occurrence of a particular event.   

The party wishing to exercise the right to break should carefully consider the wording of the lease as to:   

1)    The form and content of the break notice; 
2)    Any time periods and deadlines for serving the break notice; and 
3)    Any pre-conditions.   

Any requirements should be strictly complied with in order to avoid any possibility of the notice being held invalid. 

Special regard should be had to the service of a break notice on a tenant who has protection under Part II of the Landlord and Tenant Act 1954. In such cases, the contractual term of the lease will be ended, but not the tenancy itself: the tenancy must be brought to an end by serving a section 25 notice, specifying one of the section 30 grounds, in the usual way.   

Forfeiture   

Forfeiture (the act of forfeiting a lease) allows a landlord to end a fixed-term lease on account of a breach of the lease by the tenant. The landlord may only terminate in this way if the lease contains a forfeiture clause and that forfeiture clause allows the landlord to forfeit in respect of the tenant’s alleged breach. The procedure to follow depends upon the nature of the tenant’s breach. If the tenant has failed to pay the rent then generally there is no need to serve a preliminary notice. If there has been any other breaches of the tenant’s covenants a Section 146 Notice should be served.   

The right to forfeit can be waived so if a tenant is late paying the rent you must ensure you do not collect or demand the rent, otherwise you will be considered to have waived your right. Tenants can also apply for relief against forfeiture and this is generally granted where any outstanding sums have been paid.   

Surrender   

A surrender of a lease happens when the tenant yields up the term to his immediate landlord in order that, by mutual agreement, the term may merge in the reversion. There are two types of surrender, express and implied. An express surrender is void unless it is made by deed. An implied surrender, or surrender by operation of law, occurs when the unequivocal conduct of both parties is inconsistent with the continuation of the tenancy. This is demonstrated by the delivery of possession by the tenant and acceptance by the landlord. The landlord must have the intention to accept the surrender. The parties’ actions are considered objectively. The delivery and acceptance of the keys alone is not sufficient. There must also be some other act showing an intention by the landlord to resume possession.   

A surrender determines the tenancy so that the tenant’s interest merges with that of the immediate reversion held by the landlord. On a surrender the rent ceases to accrue and liability under covenants ceases. However, in the absence of an express release both parties remain liable for breaches arising before the surrender. For this reason, an express surrender usually includes a release and either settles any outstanding breach by means of a payment made at the date of the surrender, or expressly preserves the relevant party’s rights in respect of specified breaches. 

For VAT purposes a premium paid by a landlord in return for the surrender of a lease is consideration for an exempt supply unless the tenant has elected to waive the exemption. However, SDLT is not due where the surrender of the lease constitutes a Transfer of a Going Concern (TOGC). HMRC have accepted in principle that the surrender of a lease can be a TOGC for VAT purposes as long as all the other conditions are met. 

For SDLT purposes the surrender of a lease is the acquisition of a chargeable interest by the person (i.e. the landlord) whose estate is benefited or enlarged by the transaction and a disposal by the person (i.e. the tenant) ceasing to be entitled to that interest. A surrender by operation of law is a land transaction and is subject to SDLT. As such, any premium or other amount payable by a landlord to a tenant to procure the surrender of a lease will be subject to SDLT.

However, a reverse premium (paid by the tenant to the landlord) does not count as chargeable consideration. 

When a new lease is granted in exchange for the surrender of an existing lease between the same parties, the surrender of the old lease and the grant of the new lease do not count as chargeable consideration for each other. This means that the SDLT exchanges provisions do not apply to impose a market value SDLT charge on the transaction. 

Where a surrender has an effective date on or after 12 March 2008, the landlord will not need to submit a land transaction return or give any form of notification to HM Revenue and Customs if: 

1)       The lease was originally granted for a term of seven years or more and the chargeable consideration for the surrender is less than £40,000, or 
2)       The lease was originally for a term of less than seven years and the chargeable consideration does not exceed the zero-rate threshold.