Retail lessees often need to terminate their retail lease before it is due to expire. However, being able to end a retail lease early, in a cost effective manner, is possible but not guaranteed. In such instances, it may be necessary for a retail lessee to assign their lease or sublet the premises. This article details those clauses in a retail lease that might allow for early termination and discuss the assignment of a retail lease or subletting the premises.
Retail Lease Termination
A retail lease might permit a party to end the agreement early in a cost efficient way. Relevant clauses in this regard include those relating to:
- Early Termination;
- Mutual Agreement;
- Long term expiry; and
- Termination for Breach.
An early termination clause allows a party to terminate the lease early in certain circumstances. The clause itself detail what situations give rise to this right. If any of these apply to a lessee’s situation, they may be able to enforce the provision and end the lease early.
However, not all retail leases include this kind of term. Landlords are reluctant to include it because it interferes with the commercial security of the lease. Similarly, lessees do not usually like this kind of provision because it could potentially result in the landlord requiring the lessee to find alternate premises unexpectedly, which would interfere with their business.
Mutual Agreement Clause
A retail lease might include a mutual agreement provision. This clause allows both the lessor and lessee to mutually agree to end their agreement before its expiry date. If a retail lease does include this clause, it usually only applies to the initial term of the lease or during the term of the option to renew.
If a lessee wishes to invoke this provision, they will need to speak with their lessor. However, a landlord has the legal right to refuse any such request.
Long Term Expiry
A lessee whose original fixed lease term is complete and who rents on a monthly basis can notify their landlord of their intention to end the lease.
Termination for Breach
This clause allows either the tenant or landlord to terminate the lease if the other party breaches the agreement in a material way. If a tenant’s landlord has materially breached the lease, the tenant might be able to take advantage of it to end the lease. Lessees and lessors should become familiar with the situations that permit termination for breach.
The relevant state or territory legislation concerning retail leases might also offer a lessee the opportunity to terminate for breach. These statutes typically permit a tenant to terminate in some situations if a landlord fails to perform a statutorily required act, even before execution of the lease. For example, in NSW, the Retail Leases Act 1994 (NSW) gives a lessee the right to terminate within six months of entering into their retail lease if the landlord did not provide them with an appropriate disclosure statement at least seven days before they signed the lease. They also have a right to terminate if that statement was incomplete or misleading unless the lessor had acted reasonably and honestly and the lessee was in as substantially as good a position as if the lessor’s mistake had not occurred.
Assignment and Subletting
However, if a tenant cannot invoke any of these clauses to end their lease early, they need to consider assigning or subletting their retail lease. Assignment or subletting are much more cost effective than simply breaking the lease.
If a lessee assigns their lease, they transfer their rights and obligations under the lease to a third party. Most leases require the lessor’s consent to assign a lease. State and territory legislation provides that landlords can only withhold consent for assignment in particular instances, including:
- If the assignee wishes to change the use to which the shop is put;
- If the assignee’s financial resources and retailing skills are inferior to those of the existing tenant;
- If the lessee does not follow all appropriate statutory procedures to assign the lease;
- If a shop trades in airside premises, if the assignee has inferior skills to compete in the international retail market.
If a lessee assigns their lease, it is in their interests to follow the appropriate procedure to avoid giving their landlord the grounds to refuse the assignment.
A lessee may also consider subletting their premises. When a tenant sublets, they form a new lease with a third party. However, the legislation that governs retail leases typically gives landlords the right to include a lease provision that gives them absolute discretion to refuse consent for subletting.
Whether you can terminate a retail lease depends entirely on the terms of the lease agreement. If the lease includes a termination clause, for early termination, termination by mutual agreement or for material breach, then with the appropriate process the retail lease can be terminated. If the agreement does not allow for any termination of the lease, assigning or subletting the lease is usually the best option, so as not to incur extra costs or penalties for breaking the lease.
Making or terminating a retail lease is a complicated legal matter that requires professional assistance. LegalVision has assisted many businesses with their retail leases and can assist you with yours. Contact our leasing lawyers today on 1300 544 755 or fill out the form on this page.