Ending a commercial lease early – what rights does a tenant have?

With the continuing impact of the COVID-19 pandemic on business and new flexible working practices allowing employees to continue working from home part-time, more commercial tenants are now considering giving up their leased premises or down-sizing to smaller premises.

However, once parties enter into a valid lease, they are generally bound by the obligations under the lease, including the payment of rent, for the agreed term.

What options are then available to a tenant who is looking to end a lease early?

1. Review the terms of your lease

Tenants should check the terms of their lease for any right to terminate early. Some relevant clauses which may give a party rights to terminate include:

• force majeure clauses: which may allow a party to end a lease due to an “act of God” or other event outside the tenant’s control

• early termination clauses: which may give one or both parties the right to end a lease early if specific pre-conditions are not met, or within a certain time

• breach of lease clauses: which may give one or both parties the right to end a lease where the other has breached an obligation.

If a right to terminate exists, tenants should strictly follow the requirements and procedures set out in the lease (or any relevant legislation) when terminating the lease including any specific notice provisions.

The lease will normally set out whether any penalty is payable for early termination, whether you are required to pay the landlord’s costs, or whether you must repay any incentive (or a portion of it) that the landlord has allowed during the lease term.

2. Talk to the landlord about a mutual surrender of lease

If your lease does not give you a right to terminate, you could talk to your landlord about the possibility of an early surrender of lease on terms that are agreeable to both parties.

A landlord may, but is not obliged to, agree to an early surrender of lease. As part of the negotiation process, some of the issues which the parties should discuss include:

• when rent must be paid

• whether any compensation will be payable to the landlord

• whether you have to comply with make good obligations

• whether you have to pay the landlord’s costs.

As an incentive to the landlord, you may consider offering to help find a new tenant, agreeing to stay until a new tenant is found or agreeing to pay a surrender fee.

If the landlord agrees to a surrender of lease, the parties will need to enter into a formal deed of surrender, releasing you from all your obligations under the lease from the date of surrender. A surrender of lease form will also be required if your lease is registered on title.

Normally tenants will be responsible for the landlord’s legal costs of preparing such documentation, as well as any stamp duty and lodgement fees.

3. Consider assigning the lease

Another option for tenants to consider is assigning the lease to a new tenant.

The lease will need to be reviewed to determine whether an assignment is permitted and what conditions must be complied with. Normally commercial leases will allow an assignment with landlord’s consent, provided the proposed new tenant is financially sound and able to carry on the permitted use and comply with the provisions of the lease.

You will be responsible for finding a suitable tenant to take over the lease. You may wish to engage a leasing agent to assist with that process.

If the landlord consents to an assignment, the parties will need to enter into a deed of consent to assignment, and if the lease is registered on title, a transfer of lease form will also be required. Normally tenants will be responsible for the landlord’s legal costs or preparing such documentation, as well as the costs of stamping and registration.

As a tenant, it is important that you are released from all future obligations following an assignment of lease under the deed of consent (or lease provisions).

If you are not expressly released from your obligations, you will continue to be legally responsible for the obligations under the lease. This means that if the new tenant fails to pay rent or otherwise breaches the lease, the landlord can make a claim against you.

4. Consider sub-letting (or licencing) the whole of part of the premises

If you are unable to find a new tenant to take on the lease, or the landlord does not consent to any of the above options, you may consider subletting or licencing the whole (or part) of the premises.

Unlike an assignment of lease however, when you sub-let or licence premises, you will still be liable under the lease as head lessee and will not be released from your obligations to pay rent and so forth. This option may however help minimise any financial burden.

As with an assignment of lease, you will need to check whether your lease allows subletting or licensing. Normally the landlord’s consent will be required and certain pre-conditions will need to be satisfied.

If a landlord agrees to a sublease or licence, you will need to enter into a sublease or licence of the premises, and a deed of consent to sublease or licence. Tenants will normally be responsible for the landlord’s costs of consenting to a sublease or licence and reviewing the proposed sublease or licence.

Obtain legal advice

As leases are binding contracts, you should obtain legal advice if you wish to end your lease early to ensure you have carefully considered all available options, and are aware of the potential costs and liabilities that may arise if you end your lease before the term expires.

If you have any questions regarding this article, please contact Andrew Grima or Melissa Potter.

Authors: Stella Sun & Craig Munter