Commercial or retail leases are legally binding contractual agreements which are not easy to terminate without a specific right.
If the tenant is aware of specific issues or circumstances that may mean that the tenant will want to exit the lease early, then it is important to negotiate specific provisions dealing with this prior to entering a lease.
Sometimes unexpected circumstances arise which mean that the tenant would like to get out of the commercial lease early. In the absence of any specific provisions, the tenant should consider one of the following options and its pros and cons.
Surrender of Lease
The first method of exiting a commercial or retail lease early is to formally agree with the landlord to a surrender of the lease. This should be documented by the parties entering into a Deed of Surrender of Lease. As part of the negotiations the tenant should request a release not only of the tenant entity but also the guarantors.
The landlord may request that the tenant pay to the landlord a surrender fee. This will often be to recoup the landlord’s costs of finding a new tenant, arranging for the new lease, and the difference between the rent that the landlord would have received under the balance of the lease and the rent the landlord will receive from the new tenant.
The parties should consider what happens to the bank guarantee or bond as part of the surrender of lease. The parties may agree that it is surrendered to the landlord as part of the compensation to the landlord for the early exit. Alternatively, it should be returned to the tenant.
For registered leases, it is important that the relevant surrender of lease form is registered on the title.
Pros
- Release from the rights and obligations under the lease as a tenant and guarantor.
- Subject to the terms agreed between the parties, the bank guarantee or bond can be returned to the tenant.
Cons
- Requires the landlord’s co-operation and agreement.
- Can be a costly option requiring payment of the landlord’s costs associated with the surrender (i.e. legal fees, property agent fees, costs of entering into a lease with a new tenant).
- May require the tenant to undertake the make good obligations under the lease.
Assignment of Lease
The second method of exiting a commercial or retail lease early is to assign the tenant’s rights and interests under the lease to an assignee. An assignment is usually effected by a Deed of Assignment signed by the parties.
The landlord’s consent to the assignment is often required under the lease. As part of the consent process the landlord will usually evaluate the proposed assignee and request information regarding their financial standing and business experience. If the proposed assignee does not have sufficient financial standing or business experience then the landlord may refuse consent to the assignment of lease.
If the relevant retail lease legislation applies then the tenant should ensure that it complies with all of the requirements to put itself in the best position to assign the lease.
For registered leases, the relevant transfer forms should be registered on the title.
It is important to note that a change in control of a tenant company’s shareholders or directors is often deemed to be an assignment under the Lease. The likelihood of such an occurrence should be considered by the tenant prior to entering into the lease and the necessary amendments requested at that time.
Pros
- Landlord cannot unreasonably withhold consent to an assignment if the relevant retail lease legislation applies (this would need to be negotiated otherwise).
- Release from the rights and obligations under the lease as a tenant and guarantor if the relevant retail lease legislation applies (this would need to be negotiated otherwise).
- Return of bank guarantee or bond to the tenant.
Cons
- Payment of the landlord’s costs associated with the assignment which may include agent’s fees and legal fees.
Sublease/underlease
Another option for a tenant may be to sublease or underlease a part or the whole of the premises to recoup some or all of the monies payable from the sublessee or underlessee. For example, walls in the premises may be partitioned, allowing for shared premises between the tenant and sublessee/underlessee. Whilst the tenant remains liable for the obligations to the landlord, it may assist the tenant in complying with those obligations for the remainder of the lease term.
The landlord’s consent is often required for any alterations to the premises and to a sublease or underlease. Similar to an assignment of lease, the landlord may want to evaluate the proposed sublessee or underlessee before giving consent. If the landlord does consent to the sublease or underlease it should be documented by way of a Deed of Consent signed by the parties.
As the tenant remains liable for all of the obligations under its lease from the landlord, when negotiating a sublease or underlease a tenant should consider who is going to undertake the make good obligations at the end of the lease. If that obligation remains with the tenant, the tenant should ensure that the sublease or underlease terminates with enough time for the tenant to undertake the make good.
Pros
- In the ACT if the relevant retail lease legislation applies, landlord cannot unreasonably withhold consent to sublease or underlease (this would need to be negotiated otherwise).
- The whole or part of the tenant’s obligations under the lease are being met by a third party.
Cons
- In NSW, the landlord may be able to refuse consent in its absolute discretion.
- Payment of the landlord’s costs associated with the consent including legal fees.
- No release from the rights and obligations under the lease as a tenant or guarantor. The tenant remains responsible for the obligations if the sublessee or underlessee does not comply.
- No return of bank guarantee or bond.
Licence
A fourth option would be to licence a part or the whole of the premises. This option is similar to a sublease or underlease and would allow the tenant to recoup the monies from the licensee.
A licence allows for the non-exclusive use of the premises, which is appropriate for when the tenant will remain in the premises and there will be shared workspace or car parking arrangements.
Similar to a sublease or underlease, the landlord’s consent is usually required under the lease.
Pros
- The whole or part of the tenant’s obligations under the lease are being met by a third party.
Cons
- The landlord may be able to refuse consent in its absolute discretion.
- Payment of the landlord’s costs associated with the consent including legal fees.
- No release from the rights and obligations under the lease as a tenant or guarantor.
- No return of bank guarantee or bond.
The best way to get out of a commercial lease early is to have a specific provision in the lease that deals with early termination due to potential circumstances. Otherwise, a tenant can consider one of the above options.
Need Legal Assistance with Commercial or Retail Leases
If you need help navigating the complexities of negotiating a commercial lease agreement, our team at MV Law is here to help. We can offer expert legal advice for negotiating or terminating commercial leases to ensure assist you in achieving your most favourable outcome. Our team comprises of specialised lawyers who can provide guidance on a wide range of matters, including commercial law and evaluating contracts. If you need assistance, please don’t hesitate to contact our commercial lease lawyers on (02) 6279 4444.
At MV Law, we’re dedicated to providing you with the right legal advice and guidance, whether it’s through face-to-face consultations or our blog. Read more about commercial outgoings in a lease, heads of agreements, or the franchising code of conduct on our blog.
Author:
Jennifer Jaeschke, Special Counsel
Commercial Leasing Lawyers
MV Law Canberra
ph. (02) 8355 1331
Sheng Ho, Lawyer
Commercial Leasing Lawyers
MV Law Canberra
ph. (02) 8355 1331