When Australian property owners and business owners enter into a commercial lease agreement, there are generally specific terms outlining the duties of both parties, the duration of the agreement, and any special terms, such as early termination. Choosing to end a commercial lease before the designated terms of the agreement (typically at least three years) can be complex and frustrating. Fortunately, with the right combination of patience, knowledge, and legal guidance, early termination can be successful.
To help, we have created a list of ten points to consider when choosing to end a commercial lease early.
Determine what type of commercial lease you have
In Australia there are different types of commercial leases that apply to different circumstances. Under the law, the most common forms of commercial leases include general commercial leases, retail leases, licenses, agreements to lease and sub-leases.
It is important to know what kind of lease you have as there are different requirements and bodies that hear disputes in relation to different leases. For example, general commercial leases are governed by the common law and the Conveyancing Act (1919) NSW, and disputes are usually heard by the Supreme Court of NSW. Alternatively, retail leases are governed by the Retail Leases Act (1994) NSW and applications for termination are lodged with the NSW Civil and Administrative Tribunal. It is always preferable that you engage the services of qualified legal professionals who can help you to determine what type of commercial lease you have.
Understand the circumstances that allow for early termination under the law
Circumstances that allow the termination of a lease agreement include:
- The lease term has expired
- The landlord has chosen to exercise his or her rights to demolish or develop the property;
- The landlord and tenant negotiate a surrender of the lease;
- The property has deteriorated to an unusable state
While these circumstances relate to general termination, many circumstances lead one or both parties to a decision to terminate the agreement early. Because every commercial lease is unique and the right to terminate depends upon the specific terms of the lease, it is important to obtain legal guidance to ensure that proper legal channels are followed.
Review the original commercial lease contract
Before you submit a notice of termination to the property owner, carefully review the terms of your original lease. Review the terms of the agreement to determine the following:
- Is the lease a fixed-term lease?
- Has either party breached a fundamental term of the lease?
- Does the lease contain clauses for hardship, subletting, or early termination?
Talk to the property owner
Before deciding to terminate a commercial lease early, take the time to speak with the property owner to determine whether he or she can offer any alternative solutions to terminating the agreement. Often it is possible for the property owner to take back control of the space and re-lease it immediately without obstructing the flow of income.
Provide the property owner with as much notice as possible
Once you have decided to terminate a commercial lease before the agreed upon duration, it is important to provide the property owner with as much notice as possible. In most instances, it is recommended to provide no less than 14-days notice. Tenants should note that they will remain liable to meet all obligations under the lease (including the payment of rent) until the date that termination is effective.
Offer to help find a new tenant
Many business owners have a network of close friends, fellow business owners, and associates. If possible, utilise these networks to determine if there is a suitable candidate to take over the leased property should you choose early termination. Presenting a potential tenant to the property owner may inspire him or her to negotiate an early termination.
Research other rental spaces owned by the same property owner
If your business can operate in a smaller space, or on the outskirts of town, you may find the property owner more willing to negotiate or modify the current lease to suit both your needs. Lease modification is a positive alternative to breaching the original contract.
Early termination due to a breach
As a tenant, there are many reasons why you may wish to terminate a commercial lease. In Australia, there are strict legislation requirements for parties wishing to terminate commercial leases for breach by the other party. The notice will not be effective unless it clearly and unequivocally states that the party serving the notice is treating the lease as at an end. If a landlord wishes to terminate the lease for breach by the tenant, a notice must be provided in writing and comply with Section 129 of the Conveyancing Act (1919) NSW which requires the following:
- The notice must accurately specify the breach, and
- The notice must require the tenant to either remedy the breach or pay compensation to the landlord within a reasonable time (usually 14 days).
Notices seeking to terminate leases are often challenged, and should be prepared by lawyers wherever possible.
Consider the costs of early termination
Terminating a commercial lease early can be costly for the party effectively breaching the agreement. Some commercial lease agreements stipulate a flat rate of liquidated damages to be awarded to the “injured” party should the other party choose to terminate the agreement early. If such terms are not outlined in the original agreement, then the breaching party may be required to fulfill the terms of the lease before it is terminated.
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The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we can offer the full suite of financial products and advice to help you navigate the business landscape. Schedule a meeting here via Calendly or give us a call on 1300 1 VAULT (1300 182 858)