The essential short guide to exiting a commercial property lease before the expiration date

As a commercial property tenant, exiting a commercial property lease before the expiration date is not always straightforward. A lease is a legal contract, and a landlord can take you to Court if it is broken. However, depending on the circumstances, the landlord may be prepared to negotiate a compromise.

 A tenant may wish to leave a lease early for a variety of reasons. This may be because the business has outgrown the premises and needs to upgrade, or there is a need for different premises. On the other hand, perhaps the premises are now too expensive or too large, and it is sensible to consider down-sizing or relocation. Whatever the reason, there are a few options available to terminate the lease early.

Before looking to end a commercial property lease early, it is worth, as a tenant, seeking legal advice to ensure all responsibilities are going to be met. Moreover, there can be substantial associated costs, and even small errors can result in facing penalties. It is also important to understand whether the lease is a retail lease, which is governed by the Retail Leases Act (1994) NSW with some differences in legal and procedural requirements.

Four ways to exit a commercial lease early

The ability to exit a lease early depends upon the lease terms, market conditions at the time and the respective negotiating positions. How long is left on the lease may also be a factor.

In essence, there are two ways to exit a lease prematurely- a termination (using a break clause or lease surrender) or a transfer (assignment). A further option, though it does not provide a complete exit, is sub-letting.

1. Break Clause

If the lease has a break clause (early termination clause), this can be exercised. The landlord should be notified during the notice period, and the deadline should not be missed. The landlord may be entitled to refuse to accept the break should any of the terms of the lease be in breach and penalties may apply. The tenant may need to pay the landlord’s costs associated with ending the lease early.

2. Surrender the lease

If there is no usable break clause, it may be possible to offer the landlord a deal to surrender the lease. The primary benefit of surrendering a lease is that it will end the obligations under the lease.

The landlord is not obliged to agree to a lease surrender, but if they do, there may be some compensation and legal costs to pay.

3. Assigning the lease

Assigning a lease means passing it on to another business. The landlord’s consent will be required but cannot be unreasonably withheld. A key issue will be if the financial status of the new tenant is as good as that of the existing one. The landlord will probably wish to check this along with how the new tenant uses the premises and any planned alterations to the premises.

4. Sub-letting the leased premises

If a tenant sublets, they effectively become the landlord of the incoming tenant. It will be necessary to negotiate the terms of the sublease to cover ongoing liabilities as far as possible.

A sublease cannot give any rights to the new tenant that extend beyond a tenant's existing rights, such as giving a longer lease. A tenant may sublet all or just a portion of the premises which may be a good option if they wish to stay in the premises but reduce costs.

As this option does not release a tenant from obligations under the lease, it is important to document the sublease formally. Landlords will likely want to approve the terms of a sublease before consenting.

Finding a tenant

If you are a tenant wishing to exit early from your lease, unless you know of a suitable tenant who would like to take on your premises, you will need to employ a qualified property professional to assist in the search. They will also be able to advise you on the market conditions-a landlord is more likely to agree a deal if the property market is strong- and other aspects of the strength of your negotiating position.

Disputes

Avoiding disputes is not always possible, but steps should be taken to minimise the risks. For example, a tenant should ensure they understand and agree with all the clauses in the lease before signing it, agreeing a procedure for resolving disputes and have it included in the lease before signing the lease.

What is the best option?

What is the best option depends on the circumstances. Terminating the lease provides the cleanest exit. Usually, there will be no ongoing liabilities to the landlord.

Assignment is not so clear-cut. Depending on the lease the tenant may be left with some liabilities, such as having to guarantee some or all of the new tenant’s payments. The process may be more costly and time-consuming than termination. As well as finding a new tenant, it will be necessary to negotiate with both the new tenant and the landlord. However, if there is a long time left to run on the lease, assignment can be the best way to realise any intrinsic value.

Sub-letting can be a way of improving cash flow but it is not a way of removing oneself from the obligations of a lease, as the original lease remains in force with the retention of its liabilities.

Contact our Commercial Property Lawyers for Lease Terminations based in Sydney, NSW

At Szabo & Associates Solicitors, we can check your lease to see which options are available to you, which would work best for you and assist you in completing the optimal strategy. Similarly, we can also represent commercial landlords through the lease termination process. Either way, to discuss your individual circumstances, please call us on 02 9281 5088  or complete the online contact form.