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How to Terminate your Commercial Lease Agreement

Last revision:
Last revision: 24th May 2019
Last revision:
Category: Commercial Property

It is common for commercial leases to be created for a term of several years or more. But circumstances can change, and sometimes landlords or tenants find that they need to terminate the lease early.

The details of how and when a lease may be terminated should be set out within the lease document. As a first step, the parties should review the lease in order to determine a course of action. Generally speaking, there are a number of ways that a lease may be terminated, and this guide will discuss them below.

For the purposes of this guide, the term "landlord" will refer to the person or entity that owns a commercial property and rents it out. The term "tenant" will refer to the person or organisation that rents the property from the landlord.


Natural expiration of the term

The first and most common way that commercial leases are terminated is by the term of the lease simply expiring. For example, if a lease is created for a term of 5 (five) years, commencing on 1 June 2014, and expiring on 31 May 2019. Both parties may be permitted to go their separate ways after that date, and there may be no penalty to either party.

In some cases, commercial leases contain one or more options to renew. For example, the lease might be created for an initial term of 5 (five) years, commencing on 1 June 2014, and expiring on 31 May 2019, with an option to renew for a further two (2) years. This means that the tenant will have an option to extend the lease, so that it expires on 31 May 2021 instead.

If one or more options to renew are contained in the lease, then the lease will also contain details about what the tenant needs to do in order to exercise the option. Often this involves the tenant giving a written notice to the landlord, a certain period of time before the expiration of the first term of the lease. For example, it might say that the tenant needs to give a written notice to the landlord between six (6) months and three (3) months before the 31 May 2019 expiry date. If the tenant misses this time window, then the tenant may lose the right to exercise the option, and the lease may simply expire on 31 May 2019. Therefore, it is important that the parties pay close attention to what is actually contained in the lease.


Early termination clause

Some commercial leases contain an early termination clause, which may give a party the right to terminate the lease before the expiration date, in certain circumstances. Sometimes an early termination clause only operates for a specific time period. For example, the tenant might have the right to terminate any time during the first twelve (12) months of the lease, but after that time, the clause might no longer be available.

This sort of clause is not common, so the parties should carefully check their lease document if they intend to rely on such a clause.

If a prospective tenant has concerns that they may need to vacate the property early, then it may be worth asking for an early termination clause at the time that the lease is being negotiated. The tenant should seek legal advice in order to make sure that the clause provides the protection they require.


Mutual agreement

In some cases, the landlord and tenant simply agree to terminate a lease early.

If the lease is not due to expire for some time, but one party (Party 1, which may be the tenant or the landlord) wants to terminate it early, sometimes it can work to approach the other party (Party 2) and ask if they're willing to do so. However, if the lease does not actually give Party 1 a right to terminate early, then Party 2 may refuse (and will be within their rights).

Or in some cases Party 2 may agree, but only on certain conditions. For example, Party 2 might agree to terminate, provided that Party 1 pays a certain sum of money.

If the parties want to terminate the lease by mutual agreement, they may consider using our Mutual Rescission and Release Agreement.


Breach of lease

In some cases, if one party breaches an important term of the lease, the other party may obtain the right to terminate it.

For example, in some cases, if the tenant fails to pay rent on time, the landlord may eventually earn the right to terminate the lease. Be aware that the landlord does not usually obtain the right to terminate if rent is one (1) day late. Usually there will be a bit of a process to go through before the landlord can terminate, such as a formal notice from the landlord to the tenant, and then a certain waiting period, during which the tenant will have the opportunity to rectify the situation. After that period has passed, the landlord might obtain the right to terminate the lease.

Alternatively, the tenant might obtain the right to terminate early if, for example, the landlord fails to maintain an important feature of the property. For example, if the roof leaks, and this is affecting the tenant's business, then the tenant might be able to demand that the landlord fix it within a certain time period. If the landlord does not fix it within that time period, then the tenant might obtain the right to terminate the lease.

The exact nature of these clauses will depend on the wording of the lease. Therefore, if either party is considering terminating the lease early they should review the lease and seek legal advice.

If a tenant is late in paying rent, the landlord may send a copy of our Late Rent Notice to the tenant. In some cases the laws of the various states and territories are quite particular in relation to eviction proceedings, and the types of notices that landlords must provide before they are able to terminate a lease. In some cases, landlords are required to use a particular type of form in order to demand overdue rent, before the landlord can proceed with eviction. Minimum notice periods may also be prescribed by state or territory law.

Therefore, if landlords want to be able to go straight ahead with eviction proceedings in the event that this notice is not complied with, then they may need to check on the form and notice requirements in the relevant state or territory.


Transfer or assignment of lease

A "transfer" of lease or "assignment" of lease are effectively the same thing. They occur when one party transfers (or "assigns") the lease to another party. The lease is not actually terminated. It is just transferred to a different party.

For example, if the tenant is running a business from the property, and the tenant sells the business, then the lease might need to be transferred to the purchaser of the business. Alternatively, the landlord might sell the property, meaning that the lease needs to be transferred to the new owner of the property.

Some leases contain a term which says that the lease can be transferred or assigned to a new tenant, as long as the landlord consents. In addition, the landlord is often unable to unreasonably withhold consent.

In many cases, the lease also says that even if the lease is transferred to a new tenant, the old tenant remains responsible for the tenant's obligations under the lease. Therefore, if the new tenant fails to pay rent when it is due, the landlord might still be able to pursue the old tenant for payment of that rent.

Any transfer or assignment of lease will need to be formally documented, for example, with a Deed of Assignment of Lease. A lawyer can assist with the preparation of this.

Again, the actual wording of the lease will clarify how these clauses are actually going to operate. If in doubt, seek legal advice.


Sublease

A sublease is slightly different from a transfer or assignment of lease.

Under a transfer or assignment of lease, the old tenant is replaced by the new tenant (even though the old tenant might still be liable for the tenant's obligations under the lease). The new tenant becomes a party to the original lease.

A sublease also does not actually amount to a termination of the lease. The lease remains in place, but the property is then subleased to another party.

Under a sublease, the old tenant sublets the property to a new "subtenant". The old tenant still remains responsible for the tenant's obligations under the original lease. However the old tenant also sublets the property out to the subtenant.

A sublease might be a useful option when the old tenant wants to lease the property on slightly different terms. For example, the old tenant might only want to rent out part of the property. Or the old tenant might want to rent the property out to the subtenant for a shorter time period.

In any event, a sublease will need to be formally documented (using a "Sublease" document). It will also need to comply with any terms of the original lease. Some leases do not permit subleases, or some others do permit it, but only with the landlord's consent.

A lawyer can advise whether subleasing is permitted, and can assist with the preparation of a sublease.


In conclusion

There are many ways that a commercial lease can potentially be terminated. However, as with any legal matters, the question of whether or not this is possible will depend on what is actually in the terms of the lease.

In addition, there can be significant penalties if a party tries to terminate a lease without a valid legal right to do so.

Therefore it is important to carefully consult the lease and any supporting documentation. If there are any doubts or concerns, then seek legal advice.


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