Leaving a commercial lease early is not a simple matter of waking up one day and deciding to end a lease agreement. Since the agreement between the lessee and the landlord involves a legally binding contract, there are various financial and legal implications if you choose to leave.
This article discusses certain strategies adopted to exit a lease early.
Option 1: Termination Right in Lease – Early Termination Clause
The option to terminate the lease early may be included within the lease itself as an early termination clause. While this option provides a convenient method of exiting the lease, it is limited to lease agreements that have included it in the lease. This will usually only apply where you have expressly negotiated it at the time of signing your lease.
There may be some further costs associated with invoking this clause, such as:
- continuing to pay rent whilst the landlord fills the vacancy;
- paying for advertising fees; and
- paying for legal fees incurred in ending the lease (such as title registration fees).
You should obtain legal advice on the terms of the lease before taking any steps to terminate your lease.
Option 2: Mutual Surrender of Lease
A mutual surrender of lease is an agreement between the landlord and tenant to end their lease early. This is usually documented in a deed of surrender.
A mutual surrender is viable where it is commercially convenient for both parties, particularly where you provide the landlord with an incentive to do so.
The terms of the deed of surrender usually deals with the following:
- any payment to the landlord in exchange for the surrender of the lease;
- the release of any securities under the lease (such as security bonds, bank guarantees, and personal guarantees);
- make good obligations upon early exit;
- who will pay the cost of drafting the deed of surrender;
- who will pay the cost of any transfer duty; and
- mutual releases of liability.
It is important that you seek legal advice to ensure that this is done fairly.
This option is usually the most cost effective to the tenant as it gives certainty around any future legal and financial responsibilities.
Option 3: Assigning the lease to a new tenant
If you are able to find another tenant to take over your lease, this may give you the option to leave your commercial lease. The effect of assigning your lease to another tenant is that they will take on the tenant’s legal and financial responsibilities under the lease.
A lease cannot be assigned without the landlord’s consent. The process you will need to follow and checklist compliance will depend on the terms of your lease and whether or not your lease is a Retail Shop Lease. However, you should expect to pay the landlord’s legal fees for preparing the deed of assignment to document the assignment.
The deed of assignment will usually deal with the following:
- the conditions of the landlord’s consent;
- promises from you to the landlord and incoming tenant about any existing breaches of the lease; and
- the incoming tenant’s securities (i.e. security deposits, bank guarantees, personal guarantees).
If you are considering this option, we recommend seeking legal advice on effecting proper assignments.
Option 4: Subletting to other tenants
If the above options are unavailable or unsuitable, you may be able to sublet all or some of the premises to subtenants. With a sublease, you remain liable for the responsibilities of the tenant under the lease. Although you remain liable to the landlord for the subtenant’s breaches of the lease, some or all of the responsibilities of the tenant are subcontracted down to the subtenant. You will therefore need to rely on the terms of the sublease to protect your interests.
It is important to note that a sublease cannot be entered into without your landlord’s consent. Your landlord will likely require that you enter into a separate deed to document their consent to the subtenancy and require that they approve the terms of your sublease to the subtenant.
We recommend that you obtain legal advice to ensure that your interests are properly protected in your proposed sublease arrangement.
Have a question about a lease exit?
Obtaining legal advice when choosing to leave your commercial lease will have financial and legal benefits. This process, if not effected correctly can lead to lease disputes at a later stage. We can help you navigate the various stages and available options. Vocare Law is well equipped to assist lease negotiation and exit with a wealth of collective knowledge and over two decades experience providing insight and advice in this area. If you have any questions about this, please contact our office on 1300-VOC-LAW / 1300-862-529 or email: enquiry@vocarelaw.com.au
This article was written by Paul Neville.
**The information contained herein does not, and is not intended to, constitute legal advice and is for general informational purposes only.
