How to Get Out of a Commercial Lease Early

Being locked into a commercial lease that no longer makes commercial sense can be incredibly stressful.

Perhaps revenue has fallen. Perhaps your business has outgrown the premises. Perhaps you're relocating, restructuring, moving online, or simply trying to reduce overheads in a difficult market. Whatever the reason, many tenants eventually ask the same question:

Can I get out of my commercial lease early?

First Things First: Review the Lease and Understand Your Exposure

Before picking up the phone to your landlord or making any decisions about vacating the premises, the first step should always be reviewing the lease itself.

Every commercial lease is different. Some contain break clauses or early termination rights. Others allow assignment or subletting subject to landlord consent. Some contain personal guarantees that can expose you to liability long after you have left the leased premises.

When reviewing your lease, you should attempt to identify:

• whether it contains a break clause or early termination mechanism;
• whether assignment or subletting is permitted;
• whether any personal guarantees have been provided and if so, by whom;
• the scope of any make-good obligations;
• whether incentives or fit-out contributions may need to be repaid;
• whether the lease is in its initial term, one of its options or is in overholding; and
• whether your commercial lease is considered a retail lease pursuant to the Retail Leases Act 2003 (VIC).

This exercise is not simply administrative. It determines which exit strategies may be available and what your financial exposure might be if negotiations break down.

Many tenants make the mistake of deciding that they want to exit before understanding their lease. In our experience, that often creates unnecessary cost and significantly weakens the tenant's negotiating position.

What Options Are Available?

Depending on the terms of your lease, there might be a number of different options available to you, including:

• an assignment to another potential tenant;
• selling your business;
• entering into a deed of surrender;
• subletting all or a portion of the premises;
• utilising a break or early termination clause;
• relying on any breach of an essential term of the lease by the landlord; or
• attending mediation with the landlord.

If your commercial lease is a retail lease under the Retail Leases Act 2003, there may be even more options available to you.

Why Simply Walking Away Usually Makes Things Worse

A commercial lease creates legal obligations for the duration of its term and that can continue after it has expired or is lawfully terminated. For the duration of the term, the tenant is expected to pay rent and any specified outgoings. A failure to do so is usually a breach of an essential term of that lease.

You should also be aware that in many commercial leases, a failure to utilise the premises for its permitted use can also constitute a breach of lease.

Vacating the premises therefore does not bring the tenant’s obligations to an end. In fact, simply ignoring those obligations could result in the tenant and its guarantor incurring additional costs, such as the landlord’s legal fees. Any make-good fees and the landlord’s costs for replacing the tenant, including marketing and legal expenses, could also be charged to the tenant.

Before making any decisions about vacating the premises, you must consider and weigh up each of these potential risks and devise the most appropriate exit strategy.

Speak with Our Commercial Law Team Today

If you are considering an early exit from a commercial lease, obtaining advice early can often preserve options that may disappear once relations have deteriorated or significant liabilities have accrued.

Talk to our commercial lawyers today.