It can be extremely stressful when, as a tenant, you realise that you cannot make the rent payment on your commercial lease. Business is unpredictable and subject to so many external influences. In addition, some lease terms are quite long so when things change, your lease may need to change too. This article explains five ways that you can legally terminate a commercial lease agreement and exit the lease early.

1. Mutual Consent

Contact your landlord and ask if they would be happy to end the lease early.

However, keep in mind that they may outright refuse a request for early termination. In most cases, they will be within their rights under the lease to do so.

2. Early Termination Clause

Sometimes, your lease agreement will have an early termination clause (or break clause). However, this is very rare. If you are yet to enter into a lease, it is worth inserting this clause into your lease agreement if you feel that you may not be able to meet the financial obligations of a long lease term. However, keep in mind that you will have to negotiate with the landlord on whether such a clause will be included.

The early termination clause will set out the situations that may allow you to end the lease early. However, this clause may also provide dates during the lease where you can elect to end the lease early.

3. Breach of the Commercial Lease Agreement

If you or your landlord breach an important term of the commercial lease agreement, the other party may be able to terminate the agreement. However, you should ensure that a provision which allows termination in these circumstances is included in your lease agreement.

You should note that many of the breach provisions in lease agreements usually relate to the tenant’s conduct. You should ensure that, as the tenant, the landlord also has certain obligations to you.

For example, the landlord should provide a right to quiet enjoyment and maintain the premises fit for you to operate your business.

4. Lease Transfer

A transfer (or assignment) of a lease occurs when you transfer your rights and obligations under a lease agreement to a new tenant. However, this process involves finding a replacement tenant.

It is common for a lease to contain assignment provisions which note that you can only assign the lease if the landlord has given their consent. The terms or conditions of consent by the landlord vary from lease to lease. Therefore, it is important that you check the terms of your lease to see whether you are permitted to transfer the lease to someone else.

If the landlord does consent to you transferring the lease, you will need to enter into formal documents to undergo this process. It is common practice for the landlord to prepare the assignment of lease documents and for you to pay the landlord’s reasonable legal costs of doing so.

5. Sub-Letting the Premises

The final option for breaking your lease agreement is to sublease the property to a third party. When you sublease premises, you retain the legal responsibility as the original tenant under the lease and to the landlord. Therefore, you will require a sublease agreement between you and the subtenant.

The landlord will need to consent to any sublease arrangements, and you should not automatically assume that a sublease will be approved.  

The Costs of Early Termination

Your lease is a legally binding contract between you and your landlord. This means that you must keep paying rent and other costs under the lease. You cannot simply walk away from the premises unless you have agreed with the landlord to end the lease early.

You could face having to pay your landlord compensation if you fail to pay:

  • rent;
  • outgoings; and
  • other leasing costs.

Furthermore, you may have to pay compensation for the costs that go into advertising the property and finding a new lessee. Therefore, it is crucial that you let the landlord know as soon as possible that you intend to leave and try to find an amicable and working solution.

Note: Your personal responsibility to pay compensation will depend on who is listed as the tenant under your lease agreement. If the agreement is in your personal name, you may have to pay the compensation from your own finances. However, if the lease is in the name of a limited liability company, the compensation may be paid using the company’s finances.

Key Takeaways

As a tenant in a commercial lease agreement, it is rarely possible to break a lease early without the agreement of your landlord. Therefore, you should look at other options such as assignment of the lease or subleasing the premises. This will limit your liability and costs under the lease. If you’re looking to exit a commercial lease agreement early and are not sure whether or not you have grounds to do so, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

Emma Heuston
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