When Australian property owners and business owners enter into a commercial lease contract, there are generally specific terms outlining the duties of both parties, the duration of the agreement, and any special terms, such as early termination of lease.

Choosing to break the lease early, before the designated term of the agreement (typically at least three years), can be complex and frustrating. Fortunately, with the right combination of patience, knowledge, and the help of a commercial contract law specialist, early termination can be successful.

To help, we have created a list of 10 points to consider when choosing to break your commercial lease early.

1. Determine what type of commercial lease you have

In Australia, there are different types of commercial leases that apply to different circumstances. These include:

• General commercial leases
• Retail leases
• Licenses
• Agreements to lease
• Sub-leases

Lease type affects legal requirements and dispute resolution:

• General commercial leases: Governed by common law and the Conveyancing Act (1919) NSW; disputes heard by the Supreme Court of NSW.
• Retail leases: Governed by the Retail Leases Act (1994) NSW; disputes handled by the NSW Civil and Administrative Tribunal.

It is always preferable that you engage the services of qualified legal professionals who can help you determine what type of lease you have on your commercial property – and ensure there’s no risk of breaching the agreement.

2. Understand the circumstances that allow for early termination under the law

Circumstances that justify 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 a general termination of lease, many circumstances can lead one or both parties to a decision to terminate the agreement early. Because every commercial lease contract is unique and the right to terminate depends upon the specific terms of the lease, it is important to obtain legal advice to ensure that proper legal channels are followed.

3. 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?

4. Talk to the property owner

Before deciding to break a lease, take the time to speak with the property owner to determine whether he or she can offer any alternative solutions to ending the agreement. These may include:

• Leverage your network of friends, business owners, and associates to find a potential tenant if considering early lease termination.
• Presenting a suitable candidate to the property owner may encourage lease termination approval.
• If your business can downsize or relocate, the owner may be more willing to negotiate or modify the lease.
• Lease modification is a preferable alternative to breaching the contract.
• Before breaking a lease, discuss options with the property owner to explore alternative solutions.
• The property owner may be able to take back the space and re-lease it without disrupting their income flow.

5. Provide the property owner with as much notice as possible

Once you have decided to break a commercial lease before the agreed upon termination date, 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.

6. 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 permit that the agreement is terminated.

7. 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 a breach of contract.

8. Early termination due to a breach

Tenants may wish to terminate a commercial lease for various reasons, but strict legal requirements apply in Australia. A notice to terminate is only valid if it clearly states the lease is being treated as ended. For landlords terminating a lease due to tenant breach, notice must comply with Section 129 of the Conveyancing Act (1919) NSW.

The notice must:

• Specify the breach.
• Require the tenant to remedy the breach or pay compensation within a reasonable time (typically 14 days).
• Lease termination notices can be challenged; consult expert corporate lawyers for assistance.

9. 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.

Key Takeways

Breaking a lease early, before the agreed term (usually 3+ years), is complex but possible with the right knowledge and legal assistance. The key steps we have considered in this article include:

• Review lease terms: Understand duties, termination conditions, and any clauses on early termination.
• Understand legal grounds for termination: Includes lease expiry, property deterioration, or mutual agreement to end the lease.
• Discuss alternatives with the property owner: Explore options like subletting, downsizing, or negotiating a lease modification.
• Consult a commercial lawyer: Ensure you follow legal procedures and avoid breaching the agreement.
• Early termination can be costly, and penalties may apply, especially if the lease doesn’t include a termination clause. Always seek legal advice to understand your rights and obligations under the lease.