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Breaking a Commercial Lease Agreement

In this economic climate, it is not a far stretch to imagine commercial businesses in the unfortunate position of having to end a lease early.

In this article, we consider the ways a tenant may be able to exit a Lease in a commercial setting.

When can a lease be broken?

There are several ways a Lease may be terminated early. The following may or may not apply to you:-

1. If the fixed term of your Lease has already expired and the lease continues to operate on a month to month basis, you can end the Lease by giving written notice to your landlord. Check the terms of your lease for notice requirements.

2. If the Lease is still in a fixed term period(either the initial term or an option period), you may be able to end the lease by mutual consent.

Approach your landlord and see whether they are receptive to ending the Lease early based on your circumstances. Depending on the terms of the lease contract, the landlord may be under no obligation to agree to an early termination and be well within their rights to refuse. In that case, perhaps you may be able to negotiate a reduction in the rent amount.

3. Look to your written Lease Agreement.

Does it have an early termination clause? This clause will allow the landlord or the tenant to break the lease early in certain situations.

4. Breach of the Lease Agreement.

If either party breaches an essential term of the Lease, then the other party may be able to terminate the Lease based on this violation.

5. Assigning the lease.

An assignment is the transfer by the tenant of their rights and obligations under the lease to a new tenant. The new tenant will replace the existing tenant under the Lease, and the existing tenant will be discharged from all obligations as of the date of the assignment.

To assign the lease, the existing tenant could find a replacement tenant for the vacant premises or it could involve the sale of an existing business as well.

Look to your lease which will contain terms relating to how you can assign a lease - often the tenant will need to obtain the landlord's consent to assign the lease to another party.

If you experience difficulty sourcing a new tenant, a commercial property agent may be able to assist in this regard.

6. Sub-letting the whole of part of the premises.

Sub-letting is an inferior option to assigning the lease because the existing tenant will still be liable under the lease to the landlord and will not be released of their obligations under the lease. However, if a new tenant cannot be sourced who is willing to take over the lease (ie. an assignment), sub-letting the whole or part of the premises may help minimise losses. When you sub-let, you will remain liable under the lease to the landlord. The sub-tenant contracts personally with you and will pay you (not the landlord) a rental for their use of the premises.

The costs involved in early termination.

Remember, your lease agreement is essentially a Contract between yourself and the landlord. If you have no choice but to walk away from your obligations under the lease without having legal justification or an alternative tenant or sub-tenant to cover your costs, the landlord may pursue you for damages. These may include the cost of the rent until a new tenant takes over or until the lease term expires and the costs associated with finding a new tenant such as advertising fees and agency fees.

In this case, it would be wise to advise the landlord as soon as possible of your intention to end the lease early and do everything within your power to source a new tenant as quickly as possible to minimise any loss.

Liability

Where the tenant is a company, the Landlord may be limited to recovering damages from the company only. If the company is insolvent or has limited funds, damages recoverable by the landlord may be limited accordingly.

However, where personal guarantees have been given, or the tenant is a person, the landlord may be able to access your personal wealth to account for damages owed.

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