When you opt out of a commercial lease agreement, you are breaking a legally binding contract that has an associated financial liability owed to the Owner of the premises This can have significant consequences for tenants, including financial penalties, the loss of whatever security is associated with the lease, legal action, or potential reputational damage. It is not to be undertaken lightly.
However, if your business no longer has the capacity to pay the agreed rent or no longer needs the premises, it is important that you handle it the right way to avoid complications.
So, how to break a commercial lease? The process for breaking a lease typically involves “giving notice” and notifying the landlord in writing, negotiating a resolution, conducting any required make good provisions, and potentially paying any required costs.
Review your lease agreement
Before you make a final decision to break a commercial lease, make sure you understand your rights and responsibilities under the original lease agreement.
The lease agreement should have set out the requirements around early termination, the notice period, and any penalties associated with exiting the lease.
In many cases, if you break the lease early, you may be liable to pay out the rest of the lease term in full along with any associated costs incurred. In some cases you may be required to pay compensation in addition to this, or advertising costs to market the property. Or it may be a fixed fee in lieu of the recovery of lost rent - known as a surrender fee, or percentage of the remaining rent.
That’s why it is important to review the lease agreement to understand the penalties or obligations associated with breaking the lease.
There may also have been incentive provisions in the lease agreement that could add to the cost of breaking the lease. Depending on the terms, tenants may have to repay rental discounts or fitout costs if the lease is ended before the agreed date.
Understand the financial implications and potential costs you may incur if you decide to terminate the lease early.
Negotiate with your landlord
When determining whether to break a lease, it is important to engage with your landlord as early as possible. Through honest and upfront discussions you may be able to reach a compromised scenario or at least minimise some of the financial or legal complications. This is known as a mutual surrender of the lease.
There may be ways to reduce the impact of the break lease, perhaps through subletting agreements or taking on some responsibility to find a new tenant.
Understand that the property owner has responsibilities as well, and has made the lease agreement in good faith. They also incur costs to own and maintain the property. So it is important to be prepared for any financial obligations from the property owner, such as the cost-recovery for breaking the lease.
If a new contract is made, ensure it is documented and checked by a legal professional in order to ensure both parties are clear on their responsibilities.
Provide an appropriate notice period
Proving a proper period of notice to your landlord can help to fulfil your contractual obligations and maintain a good relationship with the property owner. Its incredibly important to ensure your Owner is aware of your current situation, however dire it may be, as they might be able to help. From an Owners point of view, its always better to work with the tenant who has the lease rather than defaulting that group, seeking compensation and then having a letting up period.
Mitigating damages when terminating a commercial property lease
When breaking a commercial lease, it can be helpful and potentially financially prudent to mitigate the damages associated with the termination.
One of the most straightforward ways to reduce the costs associated with breaking the lease is to find another tenant for the property.
Leasing companies such as Aegis Property Group specialise in sourcing tenants for lease or sublease space They may be able to find a tenant for the entire space or a part of the tenancy , as long as this has been approved in writing by the landlord.
Try to maintain an open and honest relationship with the property owner and their property manager in order to reach an agreed outcome.
Documenting the termination of a commercial property lease
Breaking a commercial property lease is breaching a contract, so its important to maintain proper documentation, with all correspondence in writing. This will create a paper trail with all actions and communication with the property owner.
Keep copies of important documents such as correspondence, emails, letters, notices, transactions and any invoices received dleasinguring maintenance or rectification works on the property. It may be prudent to take photos or a video of the property for the final inspection.
Finalising a break lease at your commercial property
When it is time for you to move out of the property, make sure you undertake all steps to finalise the lease agreement. As well as removing furniture and fixtures from the property, check the lease agreement to determine what make good provisions & end of lease obligations have been agreed. Depending on the terms, the tenant may be required to strip the space back to a “warm shell” without any fit out, or to rectify to an open-plan contemporary condition.
Once all maintenance and repairs are completed, ensure the keys are returned, any balance of payments is done, and the termination paperwork is completed.
Breaking your commercial lease
When it comes to the end of the lease agreement, it all comes back to the start of the lease and when the space was occupied or handed over for fit out. The lease agreement is the key document that sets out the terms and conditions that lessors had to follow for any planned or unplanned break-lease.
With a thorough understanding of this document, and consideration of the requirements of the property owner, the process of breaking a lease can be managed to create a reasonable outcome for both parties.
It is a significant decision to break a commercial lease. Review the lease agreement, communicate with the landlord or property owner, consider alternatives for the space, and document as required.