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Being behind on rent can have major ramifications for your shop, and most significantly, can lead to you being evicted and locked out of your business. If you are in a position where you cannot make rental payments, you should consider your options and work out a plan before it is too late. This article will describe some of the options available to your business.

Is Your Business Eligible for COVID-19 Rent Relief?

Many retail businesses have been affected by the COVID-19 pandemic. If your business has struggled, you may have some options available for rent relief or deferral. There may also be requirements that both the landlord and tenant must negotiate in good faith regarding rent relief. However, each state and territory has different requirements for a business to claim rental relief. Check your state government’s small business sector for more information about your eligibility. 

Negotiate With the Landlord

If your interests are to remain on the rented premises and continue running your business, your best option would be to negotiate some sort of rental reduction or payment plan with your commercial landlord. Remember that commercial leases might be strict regarding calculating and charging rent. You may not have an explicit legal right to obtain a rental reduction or payment plan in your rental agreement.

How to End a Lease Factsheet

A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.

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Factors to Consider Before Negotiating

It is important to know your position both legally and commercially before negotiating with the landlord. Some factors to consider are:

  • the history and relationship of your commercial lease;
  • whether you have any personal guarantees on the lease;
  • whether the entity that you signed onto the lease has any other assets;
  • how long the term of the lease is;
  • whether you have attached any long term agreements to the lease, such as equipment leases, franchise agreements, or license agreements; and
  • how much your bank guarantee is. 

It is a good idea to use these factors to determine the overall impact of your lease agreement and what the ramifications will be if negotiations are unsuccessful.

Terminate the Lease Early

You may decide to terminate your lease agreement with the landlord before the lease term is up. There are multiple options to terminate your lease agreement, each with risks and consequences. 

Termination through a contractual right

Check your lease agreement to see if there are any clauses regarding termination. To terminate your lease agreement through a contractual right with minimal repercussions, you should make sure you have followed any requirements under your lease agreement.

Mutually terminating your lease agreement

If both you and your landlord agree for you to end the lease early, make sure you settle the terms of the termination in writing. Often this document is known as a Deed of Surrender of Lease. This document is essential as it ensures that neither you nor the landlord have any further responsibilities under the lease.

Right of termination due to conduct by the other party under general contract law

You may have a right to terminate the lease agreement in some circumstances where the conduct by the landlord shows they no longer wish to be bound by the terms of the lease agreement or, before entering into the contract, the landlord made promises or statements about the arrangement/property that you relied upon when entering into the agreement and those statements later turned out to be false

Proving either of these forms of conduct is difficult. You will need clear evidence of the conduct or statements made. Generally, the court assesses these types of claims on a case-by-case basis, so you should seek legal advice if you wish to pursue this avenue of terminating your lease agreement before taking any steps to terminate.

Consequences for Improperly Terminating a Lease Early

If you do not terminate your lease properly, you may be in breach of your lease agreement. If your landlord considers that you have now breached the agreement, they might be able to:

  • re-enter the property and change the locks; and
  • recover damages from you for unpaid rent; and
  • potentially recover additional damages.

Assigning Your Lease Agreement

Another option is trying to find someone who will take over your existing lease agreement. The process of transferring your lease agreement to someone else is known as assignment. There are several factors to consider when assigning your lease agreement, including:

  • whether your lease agreement includes an assignment clause;
  • whether your landlord will provide permission to assign the lease, given they have certain rights and responsibilities relating to whether they consent to an assignment; and
  • what is the correct procedure to assign the lease, especially if there are particular steps that need you need to follow. 

Additional steps are to be followed if you are also selling your business attached to the lease.

Subletting the Property

If your commercial space can accommodate, you may consider subletting your property. When subletting, you will also need to follow similar steps regarding obtaining the landlord’s consent, as well as following the correct procedure under your lease agreement or state’s legislation. 

Bear in mind that the change in structure means you will become a sublandlord. You will be responsible for the failure of a subtenant in making rent. You are also still ultimately responsible for your obligations under the main lease. 

Key Takeaways

There are options available to you if you have been unable to pay rent out of your shop. You should seek legal advice and make a decision about your options as quickly as possible to avoid incurring further arrears and possibly leaving yourself open to eviction. 

If you need help with your retail lease, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Am I able to terminate my lease early if I cannot pay rent?

Typically, you cannot terminate your lease purely because you are behind on rent. Termination clauses in lease agreements are drafted tightly. Check your lease agreements to see whether there are any requirements to terminating your lease. If you do not terminate your lease properly, you may be liable for further damages from your landlord.

Is a landlord obligated to offer me a rent reduction?

Unless expressly stated, a landlord is not usually legally obligated to offer you any rent reductions. However, if your business satisfies the requirements under the recent COVID-19 Regulations, you may have a right to claim a rental reduction from your landlord.


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