How to Exit a Commercial Lease

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Table of Contents

• 1. Pay Out The Remainder
• 2. Assignment
• 3. Subletting
• 4. Breach By The Landlord

Tenants may need to end a commercial lease for multiple reasons – unfortunately, these issues typically arise in the middle of your lease. Although you can exit a commercial lease, there are risks if you do so before the end of the lease term. Some of the options that will be available include paying out the remainder of the lease, assigning the lease to someone else, entering into a subletting agreement and terminating the lease for a breach by the landlord. All four options depend on your unique situation and will carry different costs and risks.

1. Pay Out The Remainder

You could pay out the rest of the rent for the period that you agreed upon, but this option is likely to be very expensive.

2. Assignment

Assigning your lease is comparatively more flexible as it enables you to “assign” or transfer your lease to someone else. When companies are sold, for example, they may assign an existing lease to the new purchaser which saves them from having to find a tenant.

The lease that you signed at the beginning of the agreement will usually contain provisions discussing the assignment, and you should begin to familiarise yourself with these rules. 

Normally, a landlord can only refuse the assignment if it is unclear whether the person you are proposing will be able to meet the obligations under the lease. Whether or not the landlord has acted reasonably will depend on your situation, however, examples where owners may legitimately refuse assignment include:

• The assignment procedure set out in the lease has not been followed correctly;
• There is evidence that the proposed tenant will use the premises for a purpose that is prohibited by the lease;
• The proposed tenant does not have adequate finances to meet their obligations under the lease;
• The proposed new tenant has not handed over enough documents to the landlord.

Even though it is in the owner’s interest to have a tenant paying regular rent, if you believe that your landlord is acting unreasonably you should contact a lawyer to assist you.

3. Subletting

You could also consider subletting to another person. The most significant difference between subletting your lease rather than assigning is that you will remain a party to the lease agreement. A sublease means that someone else will replace you and pay the rent and outgoings, and you will then forward this payment to the landlord. Again you will need to check the provisions of the lease to see whether you can sublet.

There may also be additional requirements including, for instance, the need to get the landlord’s consent before negotiating a subletting agreement. The most important aspect to understand about a sublease is that your name will remain on the contract, and therefore you can be liable to the landlord. Even if the new tenant has not paid rent or has damaged the premises and therefore it is not your fault.

4. Breach By The Landlord

Finally, a commercial lease can be terminated if one of the terms of your contract has been breached. Of course, this will only be an option for you if the landlord has done something wrong and it enables you to terminate the agreement altogether. If you think you could fall into this category, you should seek independent legal advice.

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Whatever option is more suitable for your position, you will need to consider carefully the potential costs of walking away from the lease you have signed. If you have any questions or need assistance deciding on the most appropriate option, get in touch with our commercial leasing team on 1300 544 755.