Parties rarely enter into a commercial lease without fully appreciating its significance or intending to honour it. However, at times a party may need to terminate the lease early, including lessors. This article provides information about those circumstances in which a landlord could break their commercial lease.
Termination for Breach
The majority of commercial leases include a clause that allows both the lessor and lessee to terminate the lease if the other party materially breaches the agreement. However, if a landlord chooses to terminate for breach by the tenant, they must follow any procedures outlined in the lease and observe all appropriate statutory procedures when doing so. As state and territory governments are responsible for the relevant legislation, the correct legislative process for a landlord will depend on the relevant jurisdiction.
For example, in NSW the appropriate statute for a commercial (non-retail) lease is the Conveyancing Act 1919 (NSW). This Act mandates how a landlord who wishes to terminate a lease for breach must provide notice to a lessee. The lessor must serve their tenant with a notice that specifies the breach. If the lessee can remedy it, the notice must request that the tenant does so. If the lessor also seeks compensation, the notice must ask the lessee to pay the appropriate amount. If a tenant does not comply within a reasonable time, the landlord can proceed to terminate.
It is imperative that a landlord does not terminate for breach without undertaking the notice the lease and legislation require. If they do not, a lessee can challenge the termination in court. In that instance, a lessor could be liable to pay damages to the tenant.
A lessor can also terminate the lease agreement if they wish to demolish the building, provided there is a demolition clause in the lease. Commercial leases typically (but not always) include a clause that permits a landlord to do this. However, if an owner chooses to break a lease using a demolition provision, they must genuinely plan and intend to demolish the building which houses the rental premises. A court will form an unfavourable view of a lessor who invokes such a clause without any plan to demolish.
A lessor who wishes to terminate the lease in this way must follow all the procedures for doing so outlined in the lease agreement and as per relevant legislation (where applicable). If the commercial lease in question is also a retail lease, the relevant state or territory legislation governing retail leases will prescribe when a lessor can terminate for demolition and the appropriate procedure in such situations. The lessor will also have to pay compensation to their tenant.
For example, the Retail Leases Act 2003 (Vic) provides that a lessor can break a retail lease to demolish the premises only if the lease permits it. If the landlord invokes that clause, they must provide the tenant with sufficient details of the proposed demolition in writing six months before the lease ends. Such information allows the lessee to verify that the owner genuinely intends to demolish the building within a reasonable period after the lease ends. The lessee can then terminate before that date by giving a minimum of seven days written notice to the lessor. In both instances, the lessor must pay compensation to the lessee.
Many commercial leases also allow lessors to terminate the lease early if they wish to relocate their tenant to undertake extensive works at the premises. Again, a landlord must only invoke this clause if they genuinely intend to renovate and refurbish. A landlord will need to compensate their tenant and must notify them in agreement with the terms of the lease and relevant legislation, including retail leases.
For example, in Queensland, the Retail Shop Lease Act 1994 (Qld) requires a lessor to notify their tenant in writing of their intention to invoke this clause three months before the lease ends. They must also provide information about the redevelopment of the premises and demonstrate why it cannot be carried out except with vacant possession. The work itself must begin a practicable time after a tenant relocates. The lessor must also provide information on comparable retail premises. Any new lease will have the same terms and conditions as the previous one. The lessee also has the right to terminate within one month of receiving notice. If the tenant does relocate, the lessor must pay their reasonable relocation expenses.
A commercial lease is a binding legal agreement. If a landlord wishes to terminate the lease, they will incur certain costs and must follow all proper procedures. Failure to do so could make them subject to action and liable for damages.
LegalVision has provided many businesses with commercial leasing advice. If you are a landlord and have any questions about terminating your commercial lease, get in touch on 1300 544 755.