Ending a commercial lease early (breaking a lease)

 In Commercial & Property, Conveyancing

There are a number of situations where a tenant may wish to end or break a commercial lease before the lease ends. It may be that the tenant is deciding to close the business and requires the early termination of the lease as it cannot continue with the financial obligations. It might be due to damage to the premises which renders it unusable.

Here is a list of different ways that a commercial lease agreement can be ended early.

Breach of lease

If the premises are badly damaged and will take a long time to repair, or the landlord breaches any of its obligations under the lease agreement, a tenant may be able to terminate the lease. There are statutory rights to end a lease under the Retail and Commercial Leases Act 1995 (Leases Act) where premises are damaged which could be explored. There are also disclosure and other obligations of the landlord which could give the tenant the right to terminate the lease without penalty.

It is important that the terms of the lease agreement are carefully reviewed to determine your rights under the lease. Usually commercial leases are drafted in favour of the landlord which limit the amount of obligations on the landlord.

If you seek our advice about ending a commercial lease early we will certainly check to see if there are any grounds available to you to terminate the lease without penalty. We are able to review the terms of your lease agreement to determine your rights and prepare any breach or termination notices to the landlord.

 Surrender of lease

A landlord and tenant can also mutually agree to a surrender of a lease. Surrendering of the lease means that the tenant voluntarily gives up its interest as tenant in the premises and the landlord takes possession of the premises. A surrender of lease requires the landlord’s consent. The surrender might have to be negotiated with the landlord. The landlord has the right to refuse or even propose specific terms of a surrender of lease (such as a lump sum payment known as a surrender fee). Sometimes leases may be surrendered where the landlord supports the surrender- such as where a tenant decides to sell its business and the purchaser of the business enters into a new lease with the landlord, or other reasons such as another tenant becoming available at the time the existing tenant want to leave.

A tenant wanting to leave a tenancy should approach the landlord to discuss the surrender. Good ways to get a positive answer might include offering to assist the landlord to find a new tenant, agreeing to stay until a new tenant is found, or agreeing to pay an acceptable surrender fee. The cost of the surrender fee may save the tenant overall as the fee will be less than the rent for the rest of the lease term. The tenant could also with the landlord’s consent agree to appoint an agent to market the property for lease to a potential new tenant.

A surrender of lease would be formally documented in a deed of surrender of lease. The landlord’s solicitor will usually prepare the surrender of lease documentation and the tenant will be required to pay the landlord’s legal costs incurred in the surrender.

We can assist in liaising and negotiating with your landlord or its solicitor in seeking a surrender of a lease and preparing surrender of lease documentation, or help landlords negotiate and prepare the surrender documentation.

 Assignment of lease

An assignment of a lease involves the transfer (or assignment) of the rights and obligations under the commercial lease to a new tenant (or assignee). Usually a commercial lease will contain assignment provisions entitling the tenant to assign, provided that the landlord gives its consent if certain conditions are met (such as providing the landlord with information about the proposed assignee and how it proposes to use the shop). The landlord has the right to refuse an assignment of lease. There are two exceptions to this:

  • if the Leases Act applies to the lease and regulates whether a landlord can withhold consent; and
  • if the lease already contains express provisions regulating the landlord’s consent.

Note that most commercial leases in South Australia are regulated by the Leases Act.

Under the Leases Act, the landlord is entitled to withhold its consent to an assignment if any of the following circumstances apply (and is not entitled to withhold consent in any other circumstances):

  • the proposed assignee proposes to change the use to which the premises are put;
  • the proposed assignee is unlikely to be able to meet the financial obligations of the tenant under the Lease;
  • the proposed assignee’s retailing skills are inferior to those of the tenant; or
  • the tenant has not complied with procedural requirements for obtaining the landlord’s consent under the Leases Act.

Often leases are assigned if a tenant decides to sell its business to a purchaser.

It is important that the terms of the lease are reviewed in order to determine the tenant’s rights and obligations in the assignment, including the terms and conditions of the assignment (such as any continuing liability of the tenant and any guarantor after the assignment and any requirement to pay outstanding arrears as a condition to the assignment). The landlord’s solicitor will usually prepare the formal assignment of lease documentation and the tenant will be required to bear the landlord’s legal costs incurred in the assignment.

There may be serious legal consequences to a tenant who assigns a lease without the landlord’s consent, including a breach of lease and potential termination of lease.

We can assist in reviewing your lease to determine your right to assign, liaising with the landlord or its solicitor in seeking consent to the assignment (as well as act for you as conveyancer in the sale of your business) and preparing assignment of lease documentation.

Early termination clause

A lease may contain an early termination clause. This clause gives a tenant a right to terminate the lease early, usually on specified conditions. This might be necessary if, for example, the tenant had trouble meeting financial obligations under the lease during the early termination period. An early termination clause is not a standard term of a commercial lease and it would have to be requested by the tenant in the negotiations with the landlord prior to entering into the lease. A landlord has the right to refuse an early termination clause.

We can assist you in reviewing and negotiating the terms of your proposed lease including proposing a right of early termination in the lease.

 Subleasing

Subleasing (or underleasing) involves the tenant leasing to a third party the whole or part of the premises being leased by the tenant from the landlord. Subleasing will usually require the landlord’s consent. The Leases Act does not prevent a landlord from withholding its consent to subletting in its discretion. Sometimes a tenant may request during lease negotiations a clause which entitles it to sublease to a third party (such as a related body corporate) without the landlord’s consent.

Despite any sublease arrangement the tenant continues to be liable to perform the obligations under the lease. If the subtenant breaches the terms of the lease, the tenant remains liable to the landlord.

There may be serious legal consequences to a tenant who sublets without the landlord’s consent or whose subtenant results in the tenant being in breach of the lease, including a potential termination.

We recommend that a sublease agreement between the tenant and subtenant is prepared which sets out the parties’ respective rights and obligations. For the tenant, this might include an express obligation that the subtenant must not do or omit to do any act, matter or thing cause the tenant to be in breach of the lease with the landlord.

We can assist you in reviewing the terms of your lease to determine your right to sublease, preparing sublease agreement documentation, and liaising with the subtenant and landlord.

Final thoughts

Our commercial property lawyers have extensive experience in acting for and advising tenants in all aspects of commercial and retail leases. If you are considering ending a commercial lease early and need advice or direction from a lawyer, please contact Michael Stannard on (08) 8231 1110 or get in touch online.

The content of this article is intended to provide a general guide to the subject matter. It is not legal advice. Specialist advice should be sought about your specific circumstances.

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