In a challenging market, continuing to pay rent and comply with the terms of a lease may jeopardise the future of a business. Here, lawyer Oliver Meehan looks at options open to businesses in this situation.
First step – read the lease
Chase up a copy of the lease and all related documentation. There may be an Agreement for Lease, Incentive Deed, or Disclosure Statement to consider. Take a moment to read through them all, as there may be an early exit clause you have forgotten about.
Speak with a lawyer about the leasing documents and why you think you, as a tenant, can no longer comply with the lease. The lawyer may be able to generate some possible courses of action with you. If the business you are running is a franchise, approach the franchisor and explain the situation. If the landlord agrees, the franchisor may be willing to take over the lease.
Approach the landlord
Depending on the advice you receive from a lawyer or a franchisor (or both), the next step is likely to be that an approach is made to the landlord or its managing agent. A lawyer can make an approach on your behalf. The approach would probably be made on a without prejudice basis, and should clearly set out what the issue is and what you as tenant propose to do.
Merely asking to be let out of the lease for no penalty is not likely to wash unless the landlord is feeling particularly generous. Which is why it is important for you to know how to get out of a lease properly.
The landlord may be interested in a surrender if you are willing to offer releasing to the landlord some (or all) of any bank guarantee or other security provided. Alternatively, if you can demonstrate that you only need rent relief for a short period of time (and the local leasing market has softened), this may be acceptable to the landlord. Be careful not to trigger the default clauses of the lease, which may include entering into an arrangement with creditors.
Make sure any agreement you make with the landlord is in writing and signed by both parties. Again, a lawyer will be able to advise you on the terms of the agreement and what to try to negotiate to protect your interests (for example, obtaining a release for past breaches of the lease).
If the answer is “no”
If the landlord indicates it is not willing to consider an early surrender of the lease or grant you some form of relief, then you may be stuck with trying to sublease the lease or transfer the lease to a buyer of the business (also known as assigning the lease). In either course, you'll need to be familiar with what the lease says about subletting or transferring. The landlord's consent will likely be required and the landlord may be entitled to keep you (and any guarantors) liable and on the hook for the duration of the lease, even if you are no longer the tenant.
If things go bad
If you cannot continue with the lease and no relief is forthcoming from the landlord, speak with a lawyer about likely outcomes. If, for example, a company with $2 shareholding (and no substantial assets) is tenant, and no personal or corporate guarantees were provided, then there may be merit in considering whether you let the tenant default under the lease and simply wind up the tenant entity if the landlord commences legal proceedings.
Carefully consider the potential costs in walking away from a lease – for example, if a bank guarantee you have provided is cashed, this may affect your credit rating.
Depending on the circumstances, you may be able to establish a claim against the landlord – if, for example, certain representations were made by or on behalf of the landlord before the lease was entered into. You should consult a lawyer if this is the case. If the lease is for retail purposes, the administrative tribunal in your state may be able to deal with a dispute of this nature.Here is a list of them:
- Queensland Civil and Administrative Tribunal
- NSW Civil and Administrative Tribunal (NCAT)
- Victorian Civil and Administrative Tribunal
- Small Business Commissioner South Australia
- Office of Consumer Affairs and Fair Trading Tasmania
- WA State Administrative Tribunal
- Northern Territory Consumer Affairs
- In the ACT, retail lease disputes are primarily dealt with in the Magistrates Court.
Oliver Meehan is a member of the legal team at CBP Lawyers.
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