Our businesses are forever evolving. Sometimes our businesses grow faster than the initial projection. Sometimes our businesses need to be downsized. And sometimes our businesses fail. Regardless of the circumstance, the ultimate result is that the premises you leased is no longer what you need and you need to end your lease early. The premises is either too small, too big or simply not required.
At Liberty Leasing we want to ensure that Tenant’s don’t feel trapped in their lease. There are property strategies for Tenants to avoid that soul crushing feeling. In this article we explore five ways you can end your lease early.
Surrender of Lease
A surrender of lease is where the parties (i.e Tenant and Landlord) agree to end the lease prior to the expiry date. A Landlord usually has no legal obligation to agree to a surrender, so negotiating a surrender of lease occurs at a commercial level. The Landlord does, however, have a motivation to protect its business interests and ensure that successful tenants are operating from its Building or Centre. Consequently, there is usually a road to surrender through negotiation.
A surrender is documented by way of a deed of surrender of lease and any necessarily titles office form. That deed will release both parties from their obligations under the lease. If the surrender is occurring at the Tenant’s request, there will usually be a surrender fee involved. The quantum of the fee varies in each circumstance and is heavily impacted by the market, particularly the current market rent and vacancy rates. An expert in commercial tenant representation will ensure that the surrender fee is reflective, or better than, the market conditions.
You will usually be required to pay the Landlord’s legal costs.
With the benefit of forethought (or astute execution of a property strategy) your commercial tenant representation team or solicitor may have negotiated an early termination right. The clause will probably be quite specific regarding the circumstances that will give rise the right.
If you lease contains an early termination clause you should obtain some advice on its application. If you can rely on the termination clause then take the champagne out from the fridge – you can likely end the lease with minimal, if any, financial exposure.
Assignment of Lease
An assignment of the lease usually occurs in the context of a business sale. The result of an assignment is that your rights and obligations are transferred to the assignee (also the purchaser) and the lease continues on with a different Tenant.
Prior to assigning your lease you will require the Landlord’s consent. The lease (or retail legislation in your jurisdiction) may set out specific criteria that need to be met. These are usually related to the assignee’s financial position and business acumen. You can read more about this in our article ‘Landlord Consent Disputes: Assignment of Lease’.
Once the Landlord has consented to the assignment, then the parties will enter into a deed of covenant. You can generally expect this document to set out certain warranties, obligations and releases.
In contrast to a surrender of lease, you may not be completely released from your liability under the lease. If you are a retail tenant, the extent of your release is often governed by the retail legislation. In Queensland, provided the disclosure obligations are met, you and any guarantor are released from any liability under the lease resulting from a default by the assignee. If you engage a tenant representative to provide assignment of lease services ensure that they advise you of, and help you meet, the relevant disclosure obligations in your state or territory.
If you are a commercial tenant, then the extent of the release should be negotiated at the consent stage.
Subletting the premises
Subletting can be a particularly good option if you need to downsize. Depending on the market at the time, it can actually create a passive income stream.
This avenue equally requires Landlord consent. Once Landlord consent has been obtained, you will enter into a deed of consent with the Landlord and the Sub-tenant. You and the Sub-tenant will directly enter into the sublease. Your lease will likely set out some requirements for the drafting of the sublease. For example, the term of the sublease must be less than the remaining term of your lease.
The Sub-tenant will pay their rent (and other costs) directly to you as their Landlord. However, ultimately you remain responsible for the entirety of the financial obligations under the lease. The risk here is that should the Sub-tenant default under their sublease and not pay the rent, you will still need to ensure that the Landlord is paid under your lease. Though you will have rights of recourse against the Sub-tenant under the sub-lease.
Outside of franchises, this is somewhat unusual option. However, there is an option to licence your premises or parts of your premises. As an example, consider the co-working spaces. These meeting rooms operate on a licence arrangement. If you are part of a co-working space you have no right of exclusive possession to the meeting room, but the licence grants you the right to use it.
Speak to your commercial tenant representation team to determine whether licensing all / part of your premises is a good fit for your business.
If the needs of your business change, there are valid options for consideration. You can either get out of your lease completely or adopt an option which reduces your financial exposure and overall liability under the lease. There are viable property strategies for Tenants seeking to end their lease early. However, our advice is to never leave the strategising to the final hour. These strategies can take three plus months to execute.
Regardless of the option you choose, you will almost always require Landlord consent when you want to part with possession of your premises. If you are considering exiting your commercial or retail lease, contact the Liberty Leasing consultants on (07) 3359 8273 or book an appointment online.