It is not uncommon that a tenant wishes to terminate a commercial lease early, yet this can sometimes be a difficult task to complete.
Due to the fact that you have agreed and signed a commercial lease, which is a legally binding contract, it brings with it difficulties if you seek to remove yourself of these obligations early.
Despite this, there are a few ways in which a commercial lease may be terminated early:
Breach of Essential Term
If the circumstance arises when the landlord has breached an essential term of the lease, then as the tenant you may be rewarded with the right to terminate the agreement.
Whether a breach of a specific term gives the right to termination, will depend on negotiations and the terms of the lease itself.
Early Termination Clause
In some cases, a clause in the lease agreement may provide that there is a right to early exit. An early termination clause should be negotiated and agreed to before the lease is signed.
Clauses of this kind usually indicate that termination is only available after a certain period of time or event has occurred. For example it may indicate that the lease may be terminated at any time after 5 years, but before the end of the lease term.
If your lease agreement includes an early termination clause, you will have the right to terminate the lease in line with the requirements.
Negotiations With Landlord
You may seek to negotiate with the landlord and come to an agreement that is beneficial for both parties and will result in termination of the lease before the expiry date. This is often called Surrendering the Lease.
Landlords have no legal obligation to negotiate nor agree on terminating the lease early.
But, if you and the landlord are able to come to an agreement, it is recommended to get a formal Deed of Surrender prepared. Surrendering a lease means that the tenant will give up all rights and duties under the agreement, and the landlord will reclaim possession of the premises.
The Deed of Surrender will outline what has been agreed to in the negotiations.
It is important to note that the terms of surrender are also up for negotiation. As well as this, it is common that the landlord seeks the tenant pay a fee of surrender.
Assignment
Assigning a lease occurs when the tenant transfers all the legal rights and obligations, such as paying rent and repairs, to a third party. It is important to first review the lease itself to determine whether it allows for an assignment.
Successfully assigning the lease will release you from all responsibilities and duties under the agreement.
In order to transfer the lease to a third party, you must obtain the landlords consent, which should be documented in a Deed of Consent. A Deed of Assignment should also be prepared, which will transfer the rights and obligations of the lease to the third party.
It is common for the landlord to charge a reasonable fee which covers their legal and other expenses incurred by consenting to the assignment of the lease.
Subleasing
Subleasing the premises involves re-renting a portion of the premises under the existing lease to a third party. This may be appropriate if you run a business that is downsizing and have extra office space.
It is important to note that this does not fully release you from your obligations under the original lease. Instead, you will become sub-landlord and the sub-tenant will have responsibilities and duties to you. Whilst your obligations to the original landlord remain intact.
Once again, consent from the landlord will be required to sublease the premises.
To Sum Up
As a tenant, the circumstance may arise where you wish to remove yourself from the obligations of a commercial lease, before the expiry date of the agreement.
The first point of call is to examine the terms of the lease with your landlord, and determine your rights in relation to early termination.
There are numerous ways in which this can be achieved, yet some more complex than others.
If you require more assistance on this issue, please feel free to contact our commercial property lawyers on 1300 337 997, or fill out the contact form on this page.
Jethro is a paralegal. His main legal interests are with Intellectual Property, Technology and Innovation, as well as areas of Corporate Law. He is in his final year of a Bachelor of Laws/Bachelor of Economics double degree at the UTS.
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
