How to Effectively Terminate a Commercial Lease

Introduction

There may be several reasons as to why a tenant needs to end a commercial lease, whether that be to downsize, relocate or due to disputes with a landlord. However, exiting a commercial lease is not straightforward and you must always be cautious so as to avoid breaching the lease agreement.

Understanding the complexities of terminating a commercial lease requires assistance from experienced lawyers who can negotiate with the landlord, explore relevant legal avenues and help you understand your rights and obligations.

This article outlines the key methods for effectively terminating a commercial lease.

Notice or Early Termination Clauses

Whilst not common, some lease agreements may include an early termination clause, a break clause or a notice period. These types of clauses should ideally be negotiated before entering into the lease.

Such clauses are often very specific, for example you may only be able to exercise an early termination clause after a certain period of time. If your lease contains these provisions, it is also likely that you would need to pay for the landlord’s costs, including their legal costs, associated with terminating the lease early.

Assignment

Assigning a lease allows you to transfer your lease to another party.

Your lease agreement will typically contain specific provisions on how an assignment is to be dealt with and it is important that you comply with these provisions to ensure that you are not in breach of the lease.

To assign a lease, you will require the landlord’s consent. In the assignment provisions of a lease, how you go about requesting an assignment and the requirements that need to be satisfied for a landlord to provide their consent will be detailed. Examples of conditions that need to be satisfied include:

1. Providing evidence of the proposed tenant’s financials to show that they would be able to meet their obligations under the lease if it was assigned;
2. That the proposed tenant intends to use the premises for its intended purpose; and
3. That you as the current tenant are not in breach of any lease obligations, including that you are up to date with the payment of rent.

If the landlord agrees to the assignment, you will need to enter into a deed of consent to assignment or deed of assignment. This deed will detail that assignment arrangement and will include the landlord discharging you of your obligations under the commercial lease.

You will likely be required to pay the landlord’s costs related to the assignment.

Subletting

Another option to exit a commercial lease is to sublet part or all of the premises. Subletting involves you bringing in a tenant to perform obligations under a sublease, whilst you remain responsible under a head lease.

Of key importance is the fact that if you choose to sublet the premises, you are not released from your obligations under the lease. In this case, the subtenant will be responsible to you for the performance of the obligations under the sublease, and you will be legally responsible to the landlord for the entire lease. As such, it is crucial that any sublease agreement include provisions requiring the subtenant to compensate you if their actions cause you to breach or be in default under your lease.

Like assignment, subletting requires the landlord’s consent and similar conditions to those for assignment must be met.

Surrender of Lease

A surrender of lease involves you approaching your landlord to request that the lease be ended, with both parties agreeing to terminate the lease. However, the landlord has no legal obligation to surrender the lease and can do so at their discretion.

When negotiating a surrender of lease with a landlord, it is likely that you will need to pay a surrender fee to the landlord to compensate them for breaking the lease, which could include covering the costs for the remainder of the lease term. As a result, this can be a very expensive way to terminate a lease.

If the landlord agrees to surrender the lease, the terms of surrender should be detailed in a deed of surrender.

The benefit of surrendering a lease, if the landlord consents to it, is that your legal obligations under the lease will come to an end.

Breach by Landlord

A commercial lease can also be terminated if the landlord has breached a term of the lease.

However, the difficulty with this method is that the landlord must have committed a breach that under the provisions of the lease enables you to terminate the agreement.

Conclusion

Terminating a commercial lease can be quite complex and will vary depending on the provisions contained in your lease.

By carefully evaluating your options and working with experienced legal professionals, you can manage the termination of your lease in a way that minimises risks and helps achieve a favourable outcome.

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