Options to get out of a Commercial Lease.
We are often asked by commercial landlords and tenants about the terms of their commercial lease, along with the requirements to cancel if the need arises.
Parties to a commercial lease may come across a situation where a lease of premises is simply no longer working for them.
It could be for various reasons, such as that the relationship between the parties has deteriorated, the landlord wanting to sell vacant premises, the tenant wanting to relocate or is facing financial difficulties.
Whatever the reason, how does a commercial tenant withdraw from the lease without breaching their obligations?
If you are a tenant:
Your first step is to consult with your lawyer to review the terms of the lease. You need to determine what your options are and understand your obligations under the lease. Consult also with your landlord to see if they would agree. If at all possible, ensure to keep good relations with your landlord. Withdrawing from the lease before its final expiry date or end of a term will need the approval of your landlord.
If you are a landlord:
Listen to your tenants if they have a change in circumstance and be open to an amendment that will work for both parties.
Here are three options:
1. Surrender of Lease
One of the options is to terminate the lease altogether or 'surrender' the lease.
A surrender of lease requires a mutual agreement between both the landlord and tenant. The parties are effectively released from any further obligation to the other from an agreed date.
There usually will be conditions in order to surrender a lease. This may include that there are no unremedied breaches of the lease before termination and that the tenant pays all rent and outgoings up to the date of termination. Remember, keeping good relations with the other party goes a long way when you are negotiating the terms of surrender.
Most leases provide that a tenant needs to reinstate the premises to what it looked like (or as close as possible) at the commencement date (except for fair wear and tear). This is often a point of disagreement between parties especially if there is no clear evidence of what the premises looked like.
2. Assignment of Lease
Another option is for the commercial tenant to find a new tenant to take over the lease.
An assignment of lease requires the approval of the landlord, who will need to assess if the new incoming tenant is a suitable tenant for the premises. This can include a range of checks such as reviewing the financials of the incoming tenant, checking their assets and liabilities list, running credit checks and generally reviewing the trading history of the incoming tenant. If the landlord is satisfied that the incoming tenant is a suitable tenant, the landlord may require that consent to the assignment is given on the basis that there is appropriate security (such as a bond or personal guarantees) in place to secure the obligations of the incoming tenant under the lease. From an agreed date of assignment, the incoming tenant takes over the lease from the previous tenant.
Remember, if you are a guarantor of a previous tenant, the assignment of lease does not automatically release you from your obligations to the landlord. You need to check that the landlord cannot still rely on your guarantee after the lease has been assigned. Check our article on personal guarantees in commercial leases: https://www.davenportslaw.co.nz/mikes-personal-guarantee.
If you are the new tenant taking over the lease, it is important that you confirm with the landlord what your reinstatement obligations will be to avoid any issues at the end of the lease.
3. Sublease
Another option is for the commercial tenant to sublease the premises to a new tenant.
Effectively there are now three parties involved, being the landlord, the tenant (and their own guarantors, if any) and the subtenant (and their own guarantors, if any). The lease between the landlord and the tenant remains in place. The sublease will be between the tenant who becomes the "sublandlord", and the subtenant. The tenant or the sublandlord maintains the same responsibilities to the landlord and relies on the subtenant not to incur liability for the tenant to the landlord.
As with an assignment of lease, a sublease usually requires the consent of the landlord. The subtenant will likely require a copy of the lease (between the landlord and the tenant) to ensure that they can comply with the tenant's obligations under the lease.
Although there will be mutual guarantees in place, there is a nexus between the three parties and each will rely on the other to uphold their duties and obligations.
Whether parties reach an agreement to surrender, assign or sublease depends on the situation. There are other options available to withdraw from a lease if a party has breached their obligations.
It is imperative to obtain legal advice and to understand obligations before entering into a commercial lease, or if circumstances change.
