Entering into a lease for a commercial or retail premises is a big decision and will usually commit you as a tenant to a term of at least two years. While you should ensure that you are in the best position possible to see out the full term of the lease from the beginning, there can be multiple reasons as to why you would want to break a lease early. You may have decided that the business you are running is unprofitable or you may have chosen to relocate to a different location. Whatever your reasons, walking away from your lease obligations is usually considered a breach and the landlord may be entitled to recover damages from you including all unpaid rent and expenses for the rest of the lease term.
If you want to end your lease before the term has expired, you can either assign or surrender your lease. Below, we examine the process as well as the advantages and disadvantages of both of these methods.
Assigning Your Lease
Assigning or transferring your lease is one way to end your lease early. It requires that you find and locate a new tenant. Depending on your intentions, you may be looking for someone to take over the premises, or you might want to sell the entire business, together with the lease.
Tenants may assign a lease. However, if you are assigning a retail lease, you may be subject to additional regulations under the relevant Retail Leases Act for your state. Whether or not a tenant requires the landlord’s consent may vary from state to state. In NSW, for example, you must have given the incoming tenant an updated copy of the disclosure statement before requesting the landlord’s approval for an assignment.
In most states, a landlord cannot unreasonably refuse a request to assign the lease. The law does not uniformly define whether or not consent is ‘reasonable’. If you are a tenant under a retail lease in Victoria, section 60 of the Retail Leases Act 2003 (Vic) specifically sets out the circumstances under which a landlord can refuse to consent. A lease agreement will also provide a set of conditions under which, if satisfied, the landlord cannot unreasonably refuse to allow an assignment of the lease, including:
- the new incoming tenant must provide financials and references to show they can pay the rent and expenses of the lease;
- prove that the new tenant has sufficient business experience; and
- obligations for you as the existing tenant to pay all outstanding costs and fees up until the point of transfer.
If the landlord is not satisfied by the information provided by the tenant about the assignee, they may refuse the assignment. For example, if they are not satisfied that the new tenant can pay rent and other outgoings, or if they feel the new tenant may use the premises for a non-permitted purpose.
Assigning your lease is typically the most commercial option as it will be at the least cost to you. Provided you have managed to locate an incoming tenant who is willing and able to pay rent, landlords are usually open to transferring the lease.
Surrendering Your Lease
The alternative to an assignment is surrendering your lease. Note that some commercial and retail leases may not contain a specific surrender clause. A landlord may, at his or her discretion, allow you to surrender your lease if you first satisfy certain conditions (e.g. the landlord may require you to pay out a certain portion of the remaining term’s rent).
Should you and your landlord agree to a surrender, ensure you enter into a deed of release which fully releases you from any further obligations under the lease.
Once You’ve Broken Your Lease
Once you have either come to an agreement with the landlord to surrender or assign your lease, it is important to fully perform any ‘make good’ obligations under your agreement. Making good may involve ensuring the premises are left in a good and clean condition as required by the lease and that you remedy any damage to the premises. You may be further liable to the landlord for breaching your obligations under the lease if you fail to complete this clause.
Key Takeaways
If you’re looking to break your commercial or retail lease early, remember the following:
- If possible, assigning your lease is the best way to exit your lease early. Note that if you are under a retail lease, check the relevant retail lease legislation in your state as there may be additional requirements you must comply with under the law.
- A landlord generally cannot unreasonably withhold consent to the assignment of a lease.
- If you cannot find a new tenant or surrendering is your only option, it is always open to you to negotiate the terms of the surrender, as this is at the landlord’s discretion.
- Always ensure that you have complied with any termination obligations you have under the lease and that you ‘make good’ the premises as required to avoid breaching the lease agreement.
If you have any questions about your options to break your lease, get in touch with LegalVision’s leasing lawyers on 1300 544 755.