Office Lease Surrender?
JUL 2021 | LAST UPDATED
Is your current space inadequate for your future needs? Are you looking to downsize or expand (try our space calculator)?
Businesses spend much of their time finding the right space for a growing workforce, however, at some point, many companies will need to shed some square footage or relocate to more suitable accommodation. This is becoming more prevalent, particularly with COVID-19, as highlighted in the news article at SCMP.
While terminating the lease during the term is relatively straight forward for a tenant with a break option, but without, the lease can only be terminated early if the landlord is in agreement. This is known as a surrender.
LEASE SURRENDER SCENARIOS
Not all leases include a break option as their inclusion in the lease is subject to negotiation between landlord and tenant when agreeing terms (learn more here). If the landlord refuses to take a surrender, the lease will have to remain in place.
So what are the options for tenants? The tenant may be able to terminate the lease early in a few ways:
If the landlord is happy to take the premises back then a surrender is a good way to bring the lease to an end. The landlord may be influenced by their ability or wish to redevelop or refurbish the premises taken back. This is rare.
Through negotiation and mutual agreement to surrender by compensation.
Through SAVVI's Tenants Network via introduction of replacement tenant to take up a new lease with terms and condition agreeable to the landlord. Simply list your space with SAVVI to get started, and you allocated account manager will be in touch to discuss with you on a confidential basis.
THE CASE FOR AN OFFICE SURRENDER
The terms on which prospective landlords and tenants will enter into a surrender agreement are influenced by the general and local state of the market at the time the terms are negotiated.
Aside from market conditions and the negotiating strength of the parties, the reasons for and influences on the agreement of incentives include among others are listed below.
- The potential savings in successfully placing a replacement tenant to take over your lease can be huge. Often this is subject to the marketability and adaptability of the existing fit-out.
- Subject to the condition and quality of the office interior, a fit-out monetisation subsidy will be discussed with the incoming tenant.
- Reinstatement liabilities will be passed onto the incoming tenant. Thorough due dilligence will be conducted for the incoming tenant to assess the overall cost savings of taking over the premises in 'as is' condition.
- The calculation of the benefits to a tenant may consider not only the projected void costs in any existing leases surrendered or assigned, but also the costs of disposal (including legal and agency fees and any necessary incentives), and any accrued reinstatement or other liabilities
- Unless the landlord is carrying out a major refurbishment or a new replacement tenant has been found to take on the works, the tenant is generally required to restore the property to its original handover condition.
- Reinstatement costs for Class A or Prime buildings normally range from HKD 150–300 per square foot net. Learn more about mitigating such costs with the SAVVI reinstatement guide here.
- Potential synergistic value accruing to the landlord in an upwards adjustment of the rent.
- Cost of disposal and for new lease (including legal and agency fees and any necessary incentives), and any accrued dilapidations or other liabilities are absored by the existing tenant.
- Landlord may wish to repossess the premises to satisfy another tenant’s expansion requirement, particualrly to retain a larger occupier within the portfolio.
- The strength or weakness of the tenant’s covenant may be a consideration.
- Investor landlords are generally looking to hold the property for a combination of rental income and capital growth. They will seek to maintain or achieve a given level of rent and/or length of lease, to secure an income stream from a good tenant covenant, for a period that will maximise capital value. Surrenders typically are not attractive to Landlords unless the cost benefits outweight the overall opportunity cost.
LEASE SURRENDER VIA REPLACEMENT TENANT
- Possession of the premises is normally provided in “bare shell” condition. Costs associated with fitting out the space will be borne by the tenant.
- Tenants normally pay for all tenant improvements, except that the landlord normally delivers the space with suspended ceilings, ceiling lighting and restrooms (landlord’s standard handover condition).
- Fit-out savings. Cost are typically quoted and assessed on the net square footage of the space and for Class A or Prime buildings normally range from HKD 600–1200 per square foot, including construction, furniture, wiring, design fees, etc.
To learn more, refer to the SAVVI office design and fit-out guide here
- Reinstatement liabilities absorbed if the surrender space is taken in 'as is' condition. Thorough due dilligence will be conducted to assess the overall cost savings of taking over the premises in 'as is' condition.
LEASE SURRENDER MARKET | HONG KONG
Hong Kong’s Grade A Central CBD office market totals approximately 20 million sq ft of which only 6% is vacant. Off-market / shadow stock (including lease surrenders) provides tenants access and leverage to upcoming and fitted spaces that can generate massive savings together with a much broader market for cost arbitrage.
LEASE SURRENDER LEGAL PERSPECTIVE | HONG KONG
Where a surrender has been inferred?
Conduct of the landlord and tenant where a surrender by operation of law has been inferred include:
- the landlord granting a tenancy at will to the existing tenant;
- the tenant vacating the property and the landlord going into occupation ;
- the landlord allowing another to reside at the property for several weeks and carrying out redecoration;
- the landlord letting the property to a third party at the request of the (original) tenant; and
- the head landlord accepting rent from undertenants who have been directed by the tenant to pay rent to the head landlord.
Where a surrender has not been inferred
Conduct where a surrender has not been inferred include:
- the landlord accepting the keys by mistake or without prejudice;
- the tenant abandoning part of the property;
- the landlord changing the locks of the property to secure it against intruders while maintaining a claim for rent against the tenant;
- the landlord allowing a third party to occupy the property while negotiating the terms of a new lease that was not completed (the tenant unsuccessfully argued that the occupier had occupied the property as a tenant at will during the lease negotiations, which brought about a surrender of the lease by operation of law);
- the landlord failing to demand rent and service charge, when it knew that the tenant no longer wanted the lease; and
- occupation of the property by a third party following the administration of the tenant.
Accepting the surrender
If the landlord accepts a surrender (whether impliedly or deliberately), the tenant will be released from liability for paying rent and performing lease covenants in the future.
The tenant will still be liable for rent already due and any other existing breaches. The landlord may be able to pursue the tenant’s guarantor for unpaid rent and other breaches but this is a complex area where the landlord will need expert legal advice.
MONETISE YOUR FIT-OUT | HONG KONG
PARTNER WITH SAVVI
SAVVI will match accredited tenants and arrange negotiations with your landlord to release you from your lease obligations. Through off-market listings and private access to occupier demand, Tenants can structure an early lease surrender that is a win-win for all parties.
Simply list your space with SAVVI to get started, and you allocated account manager will be in touch to discuss with you on a confidential basis.
Prefer a discussion over the phone? Speak directly with our account managers today, simply email us by clicking here, and we will be in touch same day for a call.