In Short
- Ending a commercial lease early often requires negotiating options with your landlord, such as surrendering, subletting, or assigning the lease.
- Check your lease for clauses, like an early termination or break clause, that may provide an exit route.
- Each option has costs and potential legal obligations; ensure these are documented.
Tips for Businesses
Before pursuing an early lease exit, review your lease carefully and understand the financial and legal implications. Approach your landlord professionally to discuss flexible solutions. Having clear, documented agreements and understanding your obligations can help avoid future disputes.
If you wish to end your commercial lease, it will likely not be as simple as walking away and returning the keys to the landlord. Business is unpredictable and subject to many different factors, so you may wish to leave this agreement for various reasons. However, you have likely agreed to a certain lease term over the commercial property within a legally binding contract. This article will explore five options that you can consider if you want to end your commercial lease early.
A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.
1. Surrender the Lease
One option for leaving your commercial lease early is to approach your landlord and request to surrender the lease. Surrendering of the lease is when the tenant and the landlord agree to end the lease. The landlord will have no legal obligation to agree to the surrender if you try to negotiate it with them. The terms of the surrender are also open to negotiation. Often, you may need to pay a surrender fee to the landlord to compensate for breaking the lease agreement.
Deed of Surrender
If the landlord agrees to surrender your lease, you should ensure that you document this in a deed of surrender. This formal document effectively ends the relationship between you and your landlord. Both you and your landlord must sign it once you have formed an agreement to end your lease. It sets out the key agreements you have made and ensures that you have no further legal responsibilities after its termination. Key clauses that you will often find in a deed of surrender are those detailing:
- preconditions you may need to meet to surrender the lease;
- ‘make good’ requirements (i.e. requirements for you to return the premises to original condition);
- security deposit information;
- cost payments requirements; and
- release of legal responsibilities.
If you have registered your lease on the title of land, you should also ensure that you register the appropriate surrender of the lease form. This form will remove your lease from the land title certificate.
The benefit of a lease surrender is that it will end your legal obligations. However, if the landlord agrees to surrender your lease, you will often have to pay their legal costs.
2. Early Termination Clause
Some lease agreements will contain an early termination clause or a break clause. While early exit clauses are rare, they can be negotiated into a commercial lease.
As the business owner, you must negotiate these clauses before signing the lease terms. Some costs may be included as part of the early termination clause. You should expect that you will need to pay any of the landlord’s costs associated with ending the lease early. This might include legal costs to review the lease’s termination or the rent payment while your landlord finds a new commercial tenant.
Continue reading this article below the form3. Assignment of Lease
Assigning a lease is when you transfer your rights and obligations under the lease to a new tenant. This will enable you to get out of your commercial lease by finding someone else to take the lease on.
If you wish to assign your lease, you will need your landlord’s consent. Your lease might spell out what requirements you need to satisfy before the landlord will agree to assign the lease to a replacement tenant.
Assignment Deeds
If the landlord consents to the assignment of your lease, you will need to document this in a deed of assignment. There will also usually be a deed of consent to an assignment, that details the landlord’s consent. You will likely have to pay the landlord’s legal costs to consent to the commercial lease assignment.
Common terms that can be found in a deed of consent to an assignment include that from the assignment date:
- the assignee agrees to pay rent to the landlord;
- the assignee agrees to perform the tenant’s covenants; and
- the landlord discharges the tenant from the covenants and obligations in the lease.
For leases governed by retail legislation, there are specific steps that you must take before you are released from your legal responsibilities. Generally, these are required standard form disclosure documents. In leases not governed by retail legislation, you must negotiate this release of your responsibilities with the landlord. If you do not negotiate a release, you continue to be legally responsible for the actions of the new tenant under the lease. If the new tenant breaches the lease, the landlord may be able to make a legal claim against you.
4. Subletting the Premises
Another option you might consider is subletting the premises to a subtenant. You can choose to either sublet the whole premises or only a portion of the premises. This could be a good option if you wish to remain on the premises but reduce your costs, as the subtenant will pay a portion of the rent.
Subletting the premises will also require the landlord’s consent. Like an assignment, your lease will also include conditions you must satisfy before the landlord consents. These conditions are generally very similar to the ones surrounding an assignment.
Legal Responsibility
It is important to note that if you choose to sublet, this option will not release you from your obligations under the lease. While the subtenant will be legally responsible to you, you will still be legally responsible to the landlord for the entire lease. You should ensure that any sublease is formally documented, and the subtenant must compensate you if their actions cause you to breach your original lease.
5. Licensing
The final option is to licence your premises. A licence does not allow the other party to use the licensed area exclusively; this is opposite to a lease, where a tenant obtains exclusive possession. Licences are ideal for flexible and short-term arrangements or instances where there may be changing circumstances. So, if you plan to share parts of the premises with the other party, a licence will be the right form of contract.
However, a sublease may be more appropriate if you intend to put up a wall and divide the premises between the two businesses.
A licence will also require the consent of the landlord and may include conditions similar to those of an assignment or sublease. As with a sublease, licensing your premises will not end your legal responsibilities under your lease. Also, you will be legally responsible for paying the landlord’s legal costs associated with consenting to a licence.
6. Variation and Surrender of Lease
Aside from the formal options mentioned earlier, negotiating a settlement with your landlord is another approach. This can involve various arrangements, such as agreeing to a shorter lease term or a modified rent structure that reflects your current business needs. A well-negotiated settlement can provide a mutually beneficial compromise. It may include a settlement sum or other terms that ease the burden of the lease. This option requires open communication with the landlord and may involve discussions with a mediator or legal representative to ensure both parties achieve an amicable resolution. Settling the lease on mutually agreeable terms can often be a more flexible and less contentious route than the formal processes of surrender, assignment, or subletting.
Key Takeaways
A lease agreement is a binding contract you cannot walk away from without consequences. If you are in a situation where you no longer wish to lease your premises, you must consider your options. It’s not uncommon to have choices to either terminate the lease entirely or share the space to lessen your financial obligations. It is vital to be aware of the lease terms and understand when your legal responsibilities under the lease end. Just because you are not occupying the premises does not mean you can walk away from your obligations lease.
If you wish to leave your commercial lease and require legal advice, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
No, commercial leases are legally binding contracts. Walking away without following proper procedures could result in financial penalties or legal consequences.
Lease surrender is when both you and your landlord agree to end the lease early. This is typically documented in a deed of surrender, and you may have to pay a surrender fee or cover the landlord’s legal costs.
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