Unless it includes a break clause entitling one or either party to terminate early by notice, a lease will normally run for the whole term for which it is granted. However, there is nothing to stop the parties agreeing that a lease should be brought to an end early by the tenant surrendering his interest in the premises.

The commercial deal behind a surrender will depend on both the state of the market and on the position of the particular parties. The landlord may be assembling a property portfolio in anticipation of a development project. Equally, the tenant may be anxious to rid himself of an onerous lease of premises it no longer requires.

A surrender may involve a payment by the landlord to the tenant, or by the tenant to the landlord (known as a reverse surrender). VAT may or may not be payable on a surrender or reverse surrender, depending on whether the recipient of the payment has exercised the “option to tax” in relation to the premises. This is more likely to be so in the case of a landlord recipient. If the landlord pays more than £150,000 to the tenant, stamp duty land tax (SDLT) will be payable. No SDLT is payable on a reverse surrender.

On a surrender, there will often be negotiations about the tenant’s repair obligations. Invariably, these negotiations on the terminal dilapidations come down to money. Provided the deal is properly structured, any compensation paid to the landlord by the tenant will be treated as a payment of damages and will not be liable to VAT or SDLT.

We have many years’ experience of advising on the commercial and tax issues which can arise in connection with the surrender of a lease. If you would like to know more, please contact Caroline Wilton or Martin Banham-Hall.

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