In today’s day and age, it comes as no surprise that some businesses struggle to meet their financial obligations when it comes to Commercial Lease Agreements. Under what circumstances can lessees terminate their Commercial Lease Agreement and exit the lease early?
Breaking a commercial lease
There are a number of circumstances in which lessees may end a Commercial Lease Agreement early, including the following:
- Lease term expiry – If the fixed term specified in the original Commercial Lease Agreement has expired and you are now leasing the property on a month-to-month basis, you merely need to provide the landlord with written notice of your intention to end the lease. Look to the terms of your Commercial Lease Agreement to find out about the notice requirements.
- Mutual Consent – If the lease is yet to end, in other words it is still in either the initial term or the term of the option, the leasing arrangement can come to an end by mutual consent. Contact the landlord and ask if he or she would be happy to end the lease early. Keep in mind that the landlord may outright refuse a request for early termination purely based on their right to do so and the commercial interest they would be forfeiting.
- Early Termination Clause – Sometimes a Commercial Lease Agreement will have an early termination clause. If you are yet to enter into a Commercial Lease Agreement, it is worth asking your leasing lawyer to insert such a clause into your Commercial Lease Agreement (if it is not already there). The early termination clause will set out the situations that may warrant early termination of the lease.
- Breach of the Commercial Lease Agreement – If one party breaches a material term of the Commercial Lease Agreement, then the other party may be able to terminate the Commercial Lease Agreement as a result of such breach. You should ask your lawyer to check whether such a provision is included in the Commercial Lease Agreement and, if not, ask them to insert one.
- Lease Transfer – A transfer occurs when a lessee transfers his or her rights and obligations under a Commercial Lease Agreement to a new lessee. At the time of the assignment, the new lessee becomes the lessee under the Commercial Lease Agreement and the old lessee is discharged of its obligations and rights under the Commercial Lease Agreement. Transferring a Commercial Lease Agreement involves finding a replacement lessee. Check the terms of the transfer clause in the Commercial Lease Agreement to see whether you are permitted to transfer your rights and obligations under the Commercial Lease Agreement and, if so, whether you are required to obtain the prior consent of the landlord to do so.
- Sub-letting the premises – When you sub-lease a property, the original lessee is still liable to the landlord as lessee. Sub-letting is useful for minimising your loss when you cannot transfer your rights and obligations under the Commercial Lease Agreement. Under a sub-lease, the sub-lessee will pay you (the lessee) directly for use of the property.
Costs for early termination of Commercial Lease Agreement
Your Commercial Lease Agreement is a legally binding contract between you and your landlord. This means you cannot simply walk away from your rental obligations unless you have come to an agreement with the landlord for early termination, or you have successfully transferred the lease to a new lessee. If you fail to do this, you could face damages for all outstanding accrued rent (or rent up until a new lessee is found) and the costs that go into advertising the property and finding a new lessee, known as agency fees and advertising fees.
In short, let the landlord know as soon as practicable that you intend to leave and find a new lessee to replace you as quickly as you can.
If the lessee is a company, the landlord may only be able to recover damages from that company. In the event that the company is no longer solvent and is experiencing financial hardship, the amount of funds recoverable by the landlord may be limited.
In the event that the lessee has given the landlord a personal guarantee, however, the landlord will most likely be able to recover the amount owed by pursuing the lessee personally.
If you’re looking to exit a Commercial Lease Agreement early and are not sure whether or not you have grounds to do so, why not consult a leasing lawyer? At LegalVision, our team of experienced leasing lawyers would be delighted to help. Furthermore, if you need a Commercial Lease Agreement reviewed or drafted from scratch, LegalVision can certainly assist.