Thinking of terminating a Commercial Lease? Here’s what you need to know:

In the current environment there are various reasons why a tenant might want to end their Commercial Lease. However, it is more than likely you have agreed to a certain Lease term over the property within a legally binding contract. This means it is not simple to terminate your Lease. This article will explore 5 options you may consider if you wish to end your Commercial Lease early.

1.       Surrender the Lease

The first option is to approach your landlord and request to surrender the Lease. This is when both the landlord and you agree to end the Lease. The landlord has no legal obligation to surrender the Lease if you approach them regarding a surrender. In some circumstances, you may have to pay a surrender fee to the landlord to compensate for breaking the Lease agreement.

Deed of Surrender

If your landlord does agree to surrender the Lease, you should ensure this is documented in a Deed of Surrender. This is a document that formalises the end of the agreement between you and your landlord. Both parties are required to sign the Deed once you have decided to end the Lease. The Deed sets out they key agreements agreed to and ensure neither of you have any legal responsibilities post the termination of the Lease. Key details often found in a Deed of Surrender include:

·       Preconditions that may be required to be met to surrender the Lease;

·       Make good requirements (i.e., requirements for you to return the premises to original condition);

·       Security deposit information;

·       Cost payments requirements; and

·       Release of legal responsibilities.

If the Lease is registered on the title of land, you should ensure that the appropriate surrender of Lease form is registered. The form will remove your Lease from the certificate of title to the land.

The benefit of a surrender of Lease is that it brings an end to your legal obligations. However, if the landlord agrees to surrender the Lease, you will often be required to pay their legal costs.

2.       Early Termination Clause

Some Lease agreements contain an early termination clause (commonly known as a Break Clause). While early exit clauses are rare, they can be negotiated into a Commercial Lease.

As the lessee, you must negotiate these clauses prior to signing the terms of the Lease. There may be costs included as part of an early termination clause. You should expect to be required to pay the landlord’s legal fees associated with terminating the Lease early. This might include legal costs to review the termination of the Lease or the payment of rent while the landlord finds a new tenant.

3.       Assignment of Lease

Assigning a Lease is when you transfer your rights and obligations under the Lease to a new tenant. This is when you terminate your Lease by finding someone else to take the Lease on.

If you wish to assign your Lease, you will need the consent of your landlord. Your Lease might stipulate what requirements are needed to be satisfied before the landlord will agree to assign the Lease to a replacement tenant.

Some examples of these conditions are that:

·       The new tenant cannot change the permitted use of the Leased premises;

·       You must provide evidence of the new tenant’s financial strength and business skills;

·       You must not breach your Lease obligations; and

·       The new tenant must be willing to provide a personal guarantee

Assignment Deeds

If the landlord consents to the assignment of your Lease, you will need to document this in a Deed of Assignment. The most common form of this is a Deed of Consent to Assignment, this details the landlord’s consent. You will likely be required to pay for the landlord’s legal costs for consenting to the assignment of the Commercial Lease.

An assignment is different to a surrender. The Lease continues under an assignment; the tenant is just different. You will not be completely released from your legal obligations under the Lease if the Lease is assigned to someone else.

If your Lease is governed under retail legislation, there are specific steps that you must take before being released from your legal responsibilities. If your Lease is not governed by retail legislation, you will have to negotiate a release of responsibilities with your landlord. If a release of obligation is not negotiated, you continue to be legally responsible for the actions of the new tenant under the Lease. If the new tenant breaches the Lease, the landlord may be able to make a legal claim against you.

4.       Subletting the Premises

Another option is to sublet the premises to a subtenant. You can choose to either sublet the whole premises or only a portion of the premises. The advantage of this is if you wish to remain in your current premises but reduce your costs, your subtenant will pay for a portion of the rent.

Subletting the premises will require the landlord’s consent. Similarly like an assignment, your Lease will also include conditions that must be satisfied before the landlord consents. These conditions are generally very similar to the ones surrounding an assignment.

Legal Responsibility

It is important to note that if you choose to sublet, this will not release you from your obligations under the Lease. The subtenant will be legally responsible to you however, you will still be legally responsible to the landlord. Any sublease should be formally documented and requires the subtenant to compensate you if their actions cause you to breach your original lease.

5.       Licensing

The final option is to license your premises. A license does not allow the other party to use the licensed area exclusively. If you plan to share parts of the premises with the other party, a license will be the right form of contact.

A license will be best if you wish to share:

·       Meeting rooms;

·       Printing areas; and

·       Kitchens

However, if you intend to divide the premises by erecting a wall between the two businesses a Sublease may be more appropriate.

A license will also require the consent of the landlord. It may include similar conditions to an assignment or Sublease. As with a Sublease, licensing your premises will not discharge you of your legal responsibilities under the Lease. You will also be required to pay the landlord’s legal costs associated with consenting to a license.

Looking to terminate your Commercial Lease today?

Contact the team at Wainwright Legal and let us assist you.