Business owners sometimes find themselves in the position of needing to break their commercial lease. Below, we look at whether it’s possible to break a commercial lease early and the legal issues a business owner in that situation should consider.
This article does not discuss where a business owner needs to terminate their lease for breach of a lease covenant. Termination of a contract differs from having to break a lease early. Simply, termination typically happens for a reason related to the lease. In contrast, a business owner can break a contract early for a reason wholly unrelated to the lease.
Can I Break a Commercial Lease Early?
In short – yes, you can, however, it will cost you money. As a lessee (or tenant) you are legally obliged to pay all rent owing for the remainder of the lease term. Depending at which point you are breaking the lease, and your rent, that could be a significant sum.
There are certain actions you can take that may avoid such a costly situation, including:
- Assigning the lease; or
- Subletting the lease.
Assignment of a Commercial Lease
When you assign your lease, you transfer your rights and obligations under the lease to a third party. Sometimes a business owner assigns their lease when they sell their business. Importantly, leases often have specific clauses dedicated to, and restricting, a lessee right of assignment.
A commercial lease may not limit the assignment of the lease. Although technically possible, it is highly unlikely. Lessors typically introduce these restrictions so that they can have real input in relation to the new lessee. As the new lessee will occupy their property and pay them rent, this is understandable.
Usually, a lessor permits assignment providing they consent to the new tenant – this is not an absolute right to veto. The law provides that lessors can only refuse consent within specific parameters, thereby balancing the rights of both lessee and lessor. The specific legislation regulating your lease determines those parameters.
For example, in NSW lessors can only withhold consent for the assignment of a commercial lease covered by the Retail Leases Act 1994 (NSW) if:
- The incoming lessee wishes to change the use of the shop;
- The assignee has inferior financial resources or retail skills;
- The current lessee has not followed the correct procedure; or
- The incoming lessee has inferior skills to compete in the international airport retail market (if relevant).
The lessors of all non-retail commercial leases cannot withhold their consent unreasonably. If you wish to assign your lease, you need to choose your assignee carefully and follow any designated procedures.
Subletting of a Lease
If you sublet your lease, you (as lessee) make a lease with a third party. The original lease becomes the Head Lease. As with assignment, you will need to comply with any restrictions imposed on subleasing.
When you sublet (unlike assignment), the lease remains in your name. Your sublessee pays you rent and outgoings. You then forward that money on to the lessor. However, as the lease is in your name, you are legally responsible for any outstanding rent or damage to the property. Any decision to sublet therefore requires careful consideration.
Breaking your commercial lease should not affect your bond. Your lessor can only make a claim on your bond if you have breached a term of your lease. If they do not return your bond, speak with a legal professional immediately. Questions? Get in touch with our commercial leasing lawyers on 1300 544 755.