Businesses can be unpredictable. If you’ve secured a Commercial Lease and then for whatever reason have to walk away from it, it’s vital to know what your options are.
1. Rent Holiday or temporary reduction of rent
If you need to exit your lease due to financial hardship, then you may wish to first consider approaching your landlord for a temporary reduction of rent or a ‘rental holiday’ period. This might give you the breathing room to get back on track. Your landlord may also be more obliged to take this route, especially in an economic downturn where a new tenant is unlikely, or the terms aren’t as favourable with a new tenant.
2. Surrender the lease
This is essentially an upfront conversation in which you (the tenant) and the landlord negotiate a surrender of the lease. You ask your landlord to take back the premises and release you of your obligations before the contract was due to expire. At this point, your landlord has a significant upper hand and, as is usually the case, the landlord will require an early exit fee called a ‘surrender amount’.
This fee is usually decided by the landlord, and although it will be less than your initial obligation, it can still sting. The surrender is also a formal process including a ‘deed of surrender’ and will be prepared by the landlord’s lawyer.
3. Early Termination Clause
Some leases contain an ‘early termination clause’ or a break clause. They’re rare and tend to be VERY specific; however, they can be negotiated into a lease before you sign (see how we can help – Here).
Even with a great termination clause built into your contract, you will have a financial obligation to the landlord for breaking the lease.
4. Assignment of Lease
Rather than breaking the lease, in some cases you can “assign” or sub-let the property to another tenant, by agreement. First of all, you will need the consent of your landlord who can stipulate which kind of tenant they will accept, and which other requirements need to be met for them to agree to an
assignment of lease. You may also have to provide evidence that the replacement has the financial and business capacity to lease the space.
If you do get the go-ahead, you will then need to document this in a ‘deed of assignment’. This covers the details of the landlord’s consent. You’ll also most likely have to pay the landlord’s legal cost for the consent and ‘deed of assignment’.
Assignment of lease isn’t as clear-cut as it may appear. Even after a successful assignment of the lease, you aren’t released from your obligations to the landlord.
5. Subletting the Premises
This might be better considered as a compromise. Depending on your contract you can choose to sublet a portion of the space to a subtenant. If you’re trying to break the lease because of financial hardship, subletting might be a good option as it will reduce your cost.
The landlord will need to consent to your subletting the property, and as with ‘assignment’, they will stipulate the terms of subletting.
In this instance, it is important to remember that the subtenant will be legally responsible to you and you will still be legally responsible to the landlord for the lease period.
You should certainly ensure that any sublease is formally documented. Part of this documentation should include the requirement that you are compensated should the subtenant’s actions cause you to breach your original lease conditions.
The long and short of exiting Commercial Leases.
A lease is a binding contract. No matter how chummy you are with your landlord, there will be consequences. If you are in a situation where you can no longer lease the premises, then you need to consider all your options carefully. Remember that you may be able to end the lease early or share the space to reduce your financial obligations. It is imperative that you understand and are fully aware of what your legal responsibilities are and when they end under your lease contract.
LeaseHelp by Sajen Legal helps protect your business.
Businesses thrive or dwindle due to any number of factors, some you can protect yourself against, others you’re vulnerable to. Long-term business success comes from reducing risks and making yourself less exposed. Sajen Legal LeaseHelp was created to help business owners mitigate the risks inherent with commercial leasing, thus ensuring you are on a level playing field with your landlord.
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