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Breaking a commercial lease due to financial hardship

Julianne Leybag
23 July 2017 3 minute readShare
for lease sign breaking commercial lease financial hardship clause

The consequences of breaking a commercial lease early can be dire, but if worst case arises, it may be the only thing that can save a business and its owner from financial ruin. 

There are a lot of possible reasons to end a commercial lease early, but the most common reason is bankruptcy. Once bankruptcy sets in, the business is unable to gain a significant amount of profit and pay for commercial rent.

So what are the commercial lease termination options for businesses?

Consider the following steps:

  • Review regulations for early termination of lease
  • Consult with a lawyer
  • Offer to look for a new tenant
  • Provide a significant prior notice
  • Take note of early termination costs

Review laws for early termination of lease

For starters, thoroughly review the laws that govern and what circumstances allow for the abrupt termination of lease - which are usually governed at a state or territory level.

These circumstances include the following:

  • Lease term expiry
  • Property deterioration
  • Property being up for demolition/further development
  • Negotiations for a surrender of lease

If the business’ property lease falls under any of these categories,  businesses can get off the lease without worrying about making severance payments.

However, every lease contract has its own unique characteristics and provisions. A signed agreement is a signed agreement—both parties should go through the necessary process as stipulated in the agreement, especially during early lease termination.

Consult with a lawyer

What happens if you default on a commercial lease? Unless business owners seek guidance from legal professionals — such as a contract lawyers well-versed with lease contracts and agreements — they will never know what the various repercussions of defaulting are, the legal options to take regarding early termination, their rights as a lessee and what steps can be done to minimise the impact of early termination to ensure both parties benefit from the said termination.

However, this doesn’t mean that business owners should leave everything in the hands of their lawyer. It is still best to learn about the surrounding laws on commercial leases and know the available options beforehand.

Offer to look for a new tenant

One of the main reasons why property owners are averse to early lease termination is the difficulty of finding another tenant willing to pay all the necessary dues while renting out the commercial space for a long-term period. Vacant properties mean bad business for property owners and could possibly lead them to bankruptcy as well.

Since the business will be inconveniencing the property owners once they opt for an early lease termination, they can make things easier for the property owners by looking for a suitable business owner who can replace them as tenants in the property immediately after they leave the vicinity.

Volunteering to look for an immediate replacement will not only help ease the burden on the side of the property owner but could also pave the way for an easier negotiation towards an early termination.

Provide a significant prior notice

Once a business owner decides to go for an early termination of their commercial lease contract, it is important to immediately notify the property owner once the decision is final. The ideal notice period for a termination should be at least 14 days, but of course, it would be better if the notice period is much longer.

Conversely, tenants should also be aware that they are still obligated under law to meet all of the obligations indicated in the lease contract until the actual date of termination.

Providing a prior notice lets property owners know that their tenants respect them enough to keep them posted on major decisions instead of bailing out on the contract at the very last minute.

Take note of early termination costs

Deciding on an early termination means business owners may face several legal hurdles, such as termination costs. For businesses going bankrupt, termination costs could be another financial burden to an already-dying company. This is why business owners are advised to think things through first and weigh their options before deciding to go for an early termination.

In NSW, under Section 129 of the Conveyancing Act (1919) NSW, business owners have to comply with strict rules and regulations regarding early termination for commercial leases. Other state and territory laws generally have similar restrictions, though these can vary.

Once a property owner agrees to an early termination, they must provide a notice of contract specifying the exact details of the breach and must require tenants to pay compensation, if not provide measures to remedy the contract breach.

Early terminations for commercial leases can be time-consuming, stressful and demanding, but it can be done. As always, consulting a professional is the best way to ensure that everything goes smoothly and the rights of both parties are honoured.

Breaking a commercial lease due to financial hardship
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Julianne Leybag

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