Terminating a lease in NSW is not as straightforward as merely handing back the keys to a landlord. Whether you are a landlord or a tenant, terminating a lease incorrectly can lead to serious financial consequences.
This article provides a summary on the various ways commercial leases can be terminated legally in NSW.
1. What is a commercial lease?
A commercial lease is a legally binding agreement between a property owner (the landlord or lessor) and a business tenant (the lessee), under which the tenant rents the premises for the purpose of operating a business.
In NSW, the termination of a commercial lease is governed by two primary means:
- The express terms of the lease itself and,
- Common law principles.
2. Mechanisms for termination
2.1. Termination by expiration of lease contractual terms
The simplest way a commercial lease can be terminated is through the natural expiration of the lease’s fixed terms.
It is important to note that the lease must not contain provisions for an option to renew the lease, for it to be terminated upon the lease’s expiration.
2.2. Termination by agreement
A commercial lease can be terminated by mutual agreement between the landlord and the tenant. This method of termination involves the tenant surrendering their lease and requires the tenant submitting a deed of surrender which is a formal document that effectively ends the lease. The landlord is then required to accept the surrender.
The deed of surrender commonly includes terms pertaining to:
- The release of legal responsibility and future obligations;
- Preconditions that are necessary to complete before surrender;
- ‘Make good obligations’ which refer to the restoration of the premise; and
- Any costs required.
2.3. Termination by lease clause
Some commercial leases include express clauses which permit the early termination of the lease. These clauses are usually negotiated before the lease is signed. The enforcement of a‘break clause’ often requires:
- A stipulated period of notice;
- Compliance with formalities; and
- Payment of rent up that is owed.
2.4. Termination by forfeiture and re-entry
Forfeiture by re-entry is a landlord’s right to terminate a lease early due to a tenant’s breach of a lease obligation. Upon such breach, the landlord can “re-enter” the property and take back possession, therefore terminating the lease.
Whether forfeiture is available depends on:
- The terms of the lease; and
- Whether the breach is substantial.
Usually, forfeiture is available where there is a breach of a fundamental term of the lease.
Examples of fundamental breaches in commercial leases include:
- Breach of an expressly stipulated rental covenant (see: Gumland Property Holdings v Duffy Bros Fruit [2008]);
- Insolvency of the tenant;
- Abandonment of the premises.
However, it is important to note, that the High Court in Shevill v Builders Licensing Board held non-payment of rent does not automatically a fundamental breach at common law, particularly where the tenant attempts to remedy arrears.
Statutory Right of Re-Entry
Section 85(1)(d) of the Conveyancing Act 1919 (NSW) establishes an implied right for a lessor to re-enter and terminate a lease where:
- Rent is unpaid for one month; or
- There is a continuing breach of a non-rental covenant for two months; or
- Notice to repair has been served and reasonable time has elapsed without compliance.
Furthermore, Section 129 of the Conveyancing Act 1919 (NSW) requires notice to be served in cases of a breach of a non-rental covenant. The notice must:
- Outline what clause has exactly been breached;
- Provide whether the breach is capable of remedy; and
- In the case the lessor claims compensation in money for the breach, requiring the lessee to pay the same.
A tenant may apply for relief against forfeiture if they have remedied the breach.
2.5. Termination by repudiation
Additionally, another remedy that can be sought where a party to a commercial lease breaches their contractual obligations is through repudiation.
Repudiation arises when one party demonstrates an intention to no longer be bound by/or perform the terms of a contract. Following an instance of repudiation, the non-breaching party may:
- Accept the repudiation and terminate the commercial lease,
- Sue for damages and any losses that are realised.
Shevill v Builders Licensing Board [1982] established that termination and suing for damages under repudiation can coexist alongside forfeiture and re-entry. However, repudiation is difficult to establish and is usually used as an ancillary remedy alongside the much easier to establish termination by forfeiture and re-entry.
Our Services
With the complex and often costly nature of ending commercial leases, it is essential that parties strictly comply with the applicable termination mechanisms. At OpenLegal, we are committed to ensuring our clients can bring their lease agreements to an end efficiently, strategically, and without ongoing risk.
Contact OpenLegal today at enquiries@openlegal.com.au or 1300 937 574 for a confidential consultation to discuss your situation and explore the best path forward.
By Intern Jack Pulver at OpenLegal
