Commercial leases are often long term commitments. In business, things can change quickly and, as a result, business owners sometimes find themselves needing to break their commercial lease. However, breaking a lease early can have serious legal consequences if you don’t go about it properly. Below, we look at the legal issues that you, a business owner, should consider if you need to break a commercial lease early.
What is a Commercial Lease?
A commercial lease is an agreement where a landlord allows a tenant to occupy the commercial property that they own. A lease is typically in writing and sets out the rights and obligations of each party. It also documents the commercial terms of the lease, such as:
- the amount of rent that you have to pay;
- how the rent will increase over time; and
- the period of time that you have exclusive occupation of the property.
Can I Break a Commercial Lease Early?
If you want to break the lease early, the first thing that you should do is look at the terms of the lease. Some leases have a break clause. This allows you to terminate the lease early, or terminate with one month’s notice. If the lease has a break clause, you will just need to give notice of your intention to break the lease to the landlord.
However, break clauses are quite rare. Therefore, if there is no break clause, you will need to either:
- buy out the term of the lease;
- assign the lease to a third party; or
- negotiate an early exit with the landlord.
Buying Out the Lease Term
If you wish to end the lease early, you may have to pay out the remaining time left on the lease. If the lease only has a few months left, you will need to pay out the remaining balance and leave the premises as required under the lease. However, if there is a significant amount of time left on the lease, you may wish to consider assigning the lease or negotiating with the landlord. These options will be discussed below.
Alternatively, if you believe that the property will attract a new tenant relatively quickly, you could ask the landlord to advertise the premises for rent. Therefore, someone will be able to take over the lease from when you wish to end it. After the landlord has found a new tenant, you move out and pay your rent up to the date of the new tenant occupying the premises. You will also have to pay the landlord’s costs for advertising the property. This tends to work reasonably well when the premises are located in high demand areas.
Assignment of a Commercial Lease
Another alternative to abandoning a lease or paying out a lease term is assigning the lease. When you assign your lease, you transfer your rights and obligations under the lease to a third party.
The majority of leases have specific clauses relating to the rules and procedures around assignment. It is important to note that there is no standard assignment clause. Therefore, you should approve each lease on a case-by-case basis.
Assignment clauses allow the landlord to have direct input on the quality of the new tenant. Therefore, they can check business and financial references to ensure that the proposed new tenant will look after the premises and pay their rent. The landlord will then also be able to consider the new tenant’s use of the property and determine if they are appropriate for the premises.
When assigning a lease, it is important to make sure that you have clearly documented the process. It is not enough to hand over the keys and receive an email from the landlord saying that they agree to the assignment. The agreement must be documented in a deed of consent to assign the lease and a transfer of lease.
The lease may be registered at the relevant land titles office in your state. If so, you will also need to lodge the transfer of lease and pay any stamp duty before the transfer can take place.
Subletting Leased Premises
If you wish to end a lease early, you have the option to sublet the premises to a third party.
However, when you sublet your lease, you remain legally responsible to your landlord and have a separate relationship with the subtenant. As with assignment, a proposal to sublet will also require your landlord’s written consent and documentation. In this case, you will need both a sublease and an agreement to sublease.
Unlike with assignment, your lease remains registered in your name when you sublet. The person subletting from you (the sublessee) pays you rent and outgoings. You then forward that money on to the landlord. However, as the lease is in your name, you are legally responsible for any outstanding rent or damage to the property. Therefore, any decision to sublet requires careful consideration.
If you want to end your lease early, you have a number of options available to you, including:
- paying out the existing lease term;
- negotiating an early exit with the landlord;
- assigning the lease to a third party; and
- subletting the premises.
However, it should be noted that all of the above options have risks. If you have any questions about ending a commercial lease early, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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