Entering into a commercial lease is a significant time commitment for any business. However, as circumstances always change, there may come the point when a lessee needs to break a lease. This article discusses how a tenant can break their lease and exit the agreement early.
Break a Lease through the Agreement
The lease agreement itself might contain certain clauses that allow a tenant to break their lease. These include an:
- Early Termination Clause;
- Breach of Agreement Clause;
- Mutual Consent Clause; or
- Lease term expiry clause.
Early Termination Clause
This provision permits termination of a lease before its expiry date. Lessees must be aware that not all commercial lease agreements will include this kind of clause. The clause will specify the situations or circumstances that may warrant termination of the lease. A lessee should closely read their agreement to ascertain if it contains this kind of clause and, if so, whether it applies to their particular situation.
Breach of Agreement Clause
This provision allows both the lessee and lessor to terminate a lease if the other party breaches a material clause of the agreement. Depending on a lessee’s circumstances, it may provide a means of breaking the lease.
Also, if the commercial lease in question is a retail lease covered by relevant state or territory legislation, the legislation itself may also permit a lessee to terminate a lease in some instances. For example, the Retail Leases Act 1994 (NSW) allows tenants to terminate their retail lease within six months of entering into it if the lessor failed to provide the appropriate disclosure statement at least seven days before the parties executed the agreement. A tenant might also be able to terminate a lease in certain circumstances if the statement was incomplete or false and misleading.
Mutual Consent Clause
This provision allows a lessee and lessor to agree formally to end the lease. These clauses typically only apply when a tenant is in the initial term of their lease or the term of the option. If this is applicable, a lessee can speak with their lessor to ascertain if this would be a possibility. A lessor always has the legal right to refuse the request.
Lease Term Expiry Clause
If a lessee’s original fixed lease term has ended and they rent on a monthly basis, they can formally notify their landlord of their intention to end the lease. The agreement will specify the correct notification procedure for lessees. For example, how and when they must give notice.
Assignment and Subletting
If a lessee is looking to terminate a lease, they could also consider assigning their commercial lease or subletting.
If a tenant assigns their lease, they transfer their rights and obligations under the agreement to another party. Most commercial leases include a provision that allows a landlord the right to refuse a lessee permission to assign their lease. However, a landlord cannot just refuse to permit assignment at all. They can only refuse permission in certain situations. For example, in NSW if a lease is a retail lease, a lessor can refuse permission to a lessee to assign the lease if the use of the shop will change, or the proposed assignee has inferior retail skills or financial resources than the assignor (existing tenant).
Conversely, when a lessee sublets they form another lease with a third party. The lessee’s original lease then becomes the head lease. As with assignment, a commercial lease is likely to include a provision that provides rules and restrictions for subletting. It is essential that a lessee understands that even though they sublet, and their sublessee pays them rent and outgoings which they forward on to the lessor, at law the lease remains in their name. The implication of this is that if the property sustains damage or there is rent outstanding, the lessee is responsible.
A lease is a binding agreement. If a lessee just abandons their obligations under it, they are liable to pay damages for outstanding rent or rent until the lessor locates a new tenant. They are also likely to be required to pay for any costs associated with advertising the property and finding a new lessee. LegalVision has provided many businesses with tailored online legal advice. It would be our pleasure to assist you. Call LegalVision today on 1300 544 755 or fill in the form below.