my business has changed and I have a lease …
is there an escape clause? ahhh … sorry, NO!
Circumstances can change and unforeseen economic conditions can sometimes mean that you outgrow your current location or a downturn could result in your current space being too much for your requirements going forward.
Your ability to manoeuvre and successfully exit an existing Lease, while minimising the financial risk associated, will be dependent on the terms of your Lease, your current position and the prevailing market conditions.
A LEASE IS A BINDING LEGAL DOCUMENT.
However, Landlords are commercial people as well and often arrangements can be negotiated to reach an acceptable outcome for both parties.
If the thought of getting out of your commercial Lease has crossed your mind, then keep reading.
Review your Lease Agreement
The first step would be to carefully review your Lease agreement to understand the terms and conditions for ending the Lease. Most commercial leases are for a fixed term and most will require you to fulfill that entire term, unless there are specific termination clauses outlined.
Some Lease agreements include a break clause that allows either party to terminate the Lease under certain conditions, typically with written notice of a few months and only upon specific things taking place. If you have one of these clauses, be sure to follow the outlined process carefully, to ensure you are not caught short by a loophole.
Negotiate with the Landlord
Open a line of communication with your Landlord and / or Property Manager. If you have valid reasons for wanting to end the Lease early, such as financial hardship or a change in business circumstances, you can try to negotiate a mutually acceptable surrender agreement. Your Landlord may be willing to co-operate, if they believe it is in their best interest.
Keep in mind, you are trying to negotiate any outcome which brings a fair result for your business, while compensating the Landlord for their lost position.
Even if your Landlord is not willing to fix a date, where you can get out of your Lease early, they may agree to you signing an undated “Deed of Surrender of Lease”, whereby you are giving the Landlord permission to market your tenancy and as soon as they find someone to take over your location, you have pre-agreed to sign some paperwork to surrender your Lease. By signing an undated Deed of Surrender, you are committed to exiting when they find someone, so be sure this is definitely your desired outcome, before signing anything.
In most cases, when the Landlord agrees to surrendering a Lease early, they will require payment of a surrender fee. This is generally equivalent to the amount of rent, they feel they will need to cover any vacancy risk. They will also, most certainly, retain any security deposit or Bank Guarantee that you have lodged with them, to apply to any further loss they may experience, as a result of the early surrender.
Assignment or Subletting
In some cases, you may be able to find someone to take over your existing Lease, where they assign your Lease and agree to take over all of the existing terms and conditions. Be sure to check your local legislation for the regulations around this, as each state has specific regulations around the Landlords requirement to approve the assignment and under what circumstances they can deny such a request.
Alternatively, you could choose to sublet all or part of the space, subject to the Landlord’s approval. Subleasing would mean that you are still responsible for the legal obligations of the Lease, however, it may result in you being able to get some relief from the financial burden of the Lease, by another business utilising some or all of the space and paying you rent.
Keep in mind that ending a commercial Lease prematurely can have financial implications and you may be responsible for paying rent until a new Tenant is found or for the remainder of the Lease term, if you haven’t agreed otherwise.
Your Lease agreement will provide guarantees to the Landlord, in the form of a Bank Guarantee or Security Deposit and / or a personal guarantee. These are all tools that the Landlord has to encourage you to stay and not abandon the Lease early.
Should you end the Lease prematurely, without agreement, you should expect that the Landlord will keep any security deposit that you may have paid. If you have a personal guarantee on the Lease as well, this means that the Landlord can pursue you personally too, in an effort to recover any loss they might suffer.
Laws and regulations related to commercial leases can vary by state, so it is essential to be aware of the specific regulations in your area.
Finally, be sure to document all communication that you have with the Landlord and in particular, any agreements reached, ideally seeking legal advice to document final arrangements made.
At Your Leasing Co. we are committed to negotiating the best Lease terms for your business, no matter the age or stage. Ensuring that you have exit options is part of that strategy. If you need help, negotiating your next Lease, then call Your Leasing Co for a free, no obligation conversation on 1300 356 702.