How do I get out of my Commercial Lease early?

Posted on Feb 15, 2017 by Zasco van Rooyen   |   Categories: Commercial & Business Law

At the time you entered into the Lease, you were confident that you would be operating your business from that site for a long time to come. You were sure you would be in it for the long haul, and would have no problem paying the rent and other costs, and meeting your obligations under the Lease.

Now, for whatever reason, you need to get out of the Lease before the terminating date – can that be achieved?

  1. Negotiating with the Lessor to ‘break’ the Lease

One way that you may be able to get out of your Lease early is to negotiate a ‘break agreement’ with the Lessor. If this is agreed to, the Lessor will most likely require you to continue to pay the rent and outgoings until a new tenant can be found, as well their associated costs of finding and securing a new tenant.

Alternatively, the Lessor may allow you to pay them a lump sum payment upfront in exchange for allowing you to terminate the Lease early.

 

  1. Entering into a Sublease

A sublease is an arrangement which allows another third party to become the tenant of the Premises while your Lease is still on foot. They are referred to as the Sublessee, and you become the Sublessor. The Sublessee pays the rent and outgoings to you as the Sublessor and you forward those payments on to the Lessor.

One of the problems with entering into a Sublease is that you still ultimately remain liable to the Lessor for all payments and other obligations. If the Sublessee fails to pay the rent or outgoings to you, or breaches the Lease in some other way, you will be responsible for rectifying the breach.

In addition, you usually cannot enter into a Sublease without the Lessor’s consent. Most Leases will include a term requiring you to advise the Lessor of your intentions and to obtain the Lessor’s approval of any prospective Sublessee. You will also be responsible for the Lessor’s costs of reviewing and consenting to the arrangement.

 

  1. Assigning or Transferring the Lease

Most Leases also contain a clause that will allow you to assign, or transfer, the Lease in certain circumstances. By assigning the Lease, you transfer all of your rights and obligations under the Lease to the assignee, and they become the tenant of the premises.

It is important to keep in mind though that, as when entering into a Sublease, most Leases will contain conditions requiring the Lessor’s consent and approval of any potential assignment of the Lease. In addition, you will be liable for the Lessor’s legal costs of arranging the transfer.

 

  1. Avoiding the Lease

Instead of negotiating to break the Lease or to formally transfer it to another party, it may be possible for you to avoid the Lease if the Lessor has acted in a way that is contrary to their rights under the Lease, or if they have failed to fulfil their obligations in some way. For example, if the Lessor has failed to maintain the structural integrity of the premises, and the property has deteriorated into an unusable state, the Lessee may be entitled to terminate the Lease.

Alternatively, if the premises have been damaged, for example in a natural disaster or due to some other cause, you may be able to terminate the Lease early.

 

  1. Lessor’s Failure to Follow Correct Procedures

It may be possible for you to get out of your Lease early if the Lessor has failed to follow the correct procedures at the time the Lease was entered into.

For example, if the Lease is subject to the Retail Leases Act 1994 (NSW), the Lessor is required to provide tenants with a disclosure statement at least seven (7) days prior to entering into a Lease. The disclosure statement should contain all key details of the Lease and be a full and accurate representation of all relevant matters. If this does not occur, the Lessee may be entitled to terminate the Lease during the first six (6) months of the Lease term.

 

Take Home Message

A Lease is a legal document, and is as serious and as important as any other contract you may consider entering into. You should always ensure you read the Lease fully before signing it, and obtain independent legal advice regarding your obligations and rights under the terms of the Lease.

While it may be possible for you to get out of the Lease early in particular circumstances, none of the above options should be relied on as a certainty at the time that the Lease is signed. It is essential that tenants understand every element of the Lease they are presented with by a Lessor, and carefully assess whether they are prepared and able to commit to the Lease for the entire term.

Baker Love Lawyers’ commercial leasing team is able to explain the complexities of your commercial lease, and secure the best possible outcome for your individual situation. Please call us and make an appointment.