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What to consider before breaking your commercial lease

Many businesses are struggling to pay the rent as COVID-19 restrictions continue. If you’re in this situation, terminating the lease is normally the best way to avoid spiralling debts and legal costs. But with the government recently announcing relief measures for commercial tenants, there might be other options worth considering.

Rent reductions and deferrals

If your revenue has not completely dried up, asking for rent relief may be a viable short-term solution. The government has banned evictions for the next six months and introduced new rules designed to provide financial relief for tenants and landlords affected by the coronavirus, including:

rent reductions, waivers, and deferrals, based on the tenant’s loss of income
a mandatory rent payment deferral period of 24 months or the term of the lease
a ban on rent increases during the pandemic and for a reasonable period after
requiring landlords pass on other benefits (such as statutory fee discounts) to tenants.

Keep in mind that if you are granted a rent deferral, you still accrue debt until the end of the rent reduction period that will need to be paid. That’s why it’s important to weigh up all the risks and benefits of holding on to your lease and to consult your financial advisor before deciding whether to stay or go.

Terminating the lease

Some businesses may not be able to continue making rental payments of any amount. As a result, terminating your lease as soon as possible might be the only option. If you’re in this situation, keep in mind that tenants are still required to commit to the terms of their lease, even after they have qualified for rent relief under the new rules.

Some lease agreements include an early termination clause which allows you to exit a lease under certain conditions. However, such clauses aren’t very common. To avoid the potentially long and expensive process of breaking a lease, other options can include:

Surrendering the lease: You may be able to arrange for a surrender of the lease with your landlord. They are not obliged to offer one, and you might have to pay a surrender fee to make up for some of the rent lost.
Assigning the lease: You might be lucky enough to have another tenant who could take over your lease. This usually requires signing a deed of assignment and accepting some legal responsibility for the actions of the new lessee.
Subletting: If there are parts of the premises you can share with other tenants, this can be a way to remain on the premises while reducing your costs to a manageable level.

Further relief for renters could be on the way, with some states exploring the option of allowing business owners who are in financial distress to terminate a commercial lease without penalty. If you don’t have time to wait for the winds to change, however, it’s worth having a conversation with your landlord and finding out whether you can pursue one of the options above.

It is important to note this information does not represent legal advice and you should seek specific legal advice for your circumstances. We recommend Australian Business Lawyers & Advisors to help find solutions and minimise risk on your workplace.