Early Termination of Leases
This guide is designed to deal with the circumstances where a tenant may wish to terminate their tenancy before expiration of the lease. A tenant may be able to “get out” or mitigate his lease obligations by way of an assignment of the lease to a third party, a sub-lease or an agreed early termination of the lease.
Assignment of the lease
Subject to the agreement of the owner, the lease may be transferred into a third party’s name. That party would then take on the obligations of the lease as if they were the tenant.
Most leases require the owner to act reasonably when considering a lease assignment. However, the owner need not consent to the assignment if they feel that the new tenant is not of the same standard as the current lessee. This value judgment may be made by reference to various factors including the nature of the new tenant’s business and their financial standing. A tenant’s obligations to the owner remain until a deed of assignment is signed.
Where a tenant has no need for some or all of their space, they may be able to sub-lease it to a third party. Typically, this requires the agreement of the owner.
Irrespective of any sub-lease arrangements, the obligations under the lease to the owner remain with the tenant. That means, for example, if the sub-tenant breaches any conditions of the lease (damage to the property, payment of rent etc), the tenant remains liable. Because there is no relationship between the owner and the sub-tenant, the sub-tenant’s sub-lease may not extend beyond the termination of the tenant’s lease with the owner.
Early termination of leases
There are a number of ways agreement to terminate a lease early might be reached with the owner. For example, a tenant may be able to offer the owner a lump sum to agree the early termination. This amount would typically approximate the owner's likely loss from having their property vacant and the associated costs of attracting a new tenant (agent’s fees, rent free periods, fitout contributions etc).
An alternative is for the tenant to find an alternate tenant to take on the lease. With the owner’s agreement, the tenant instructs an agent to find a new tenant and agree an acceptable new lease with the owner. This gives the tenant an element of control over the process (as they sign the agency agreement with the agent), but will still likely be liable for costs (agent’s fee as well as other incentives given). To some extent, the costs to be borne by the tenant may be subject to negotiation with the owner. In exchange, the owner gives the tenant conditional approval to an early termination of the lease.
Tenants should note that they will remain liable to meet all obligations under their lease (including make good requirements and rent payments) until the lease is terminated (ie they are given a notice of termination with a date of effective termination). This will be provided to the tenant by either the agent or the owner’s solicitor. Tenants are advised to ensure they have sufficient time to make good the premises before the new tenant takes up occupation. There is often a risk that a deal may “fall over” between the time it is agreed and sign up. This is a risk borne by the tenant. It is highly likely a landlord would rescind their agreement to terminate a lease early if the new deal does not proceed.
Norwest Commercial & Industrial is able to assist you with the above. We will look to provide a win-win situation for all parties in the event an early termination of your lease is required. Please contact us at the earliest possible time on 9899-1699 to assess your options.
The above is general advice, and tenants should seek professional legal advice if they require further clarification of particular circumstances.