Terminating A Commercial Lease: How Do I Get Out of a Commercial Lease in NZ?
23 November, 2023 | Bret Gower
Signing a commercial lease agreement is a significant step for any business. However, unforeseen circumstances can lead to the need for early lease termination. In this article, we’ll explore your options to exit a commercial lease.
Understanding Your Lease
Start by thoroughly reviewing your lease document (with your lawyer if necessary). It should contain essential information regarding any termination options available to you, notice periods, and penalties for early termination. A clear understanding of these terms is crucial, and you should have your lawyer explain anything you are not clear about. In most instances, for example under the commonly used ADLS form of lease, early termination by the tenant is not a standard option.
It cannot be stated too strongly the importance of maintaining a good working relationship with your landlord, particularly if you wish to negotiate an early termination of the lease. Generally, landlords are not obliged to provide an early release to their tenants and, having granted a lease for a fixed period of time, expect the tenant will perform their side of the agreement. Landlords can, and do, enforce the tenant’s (and if necessary, the guarantor’s) obligations e.g. the obligation to pay the rent until the end of the agreed term (which can be very costly to you as the tenant).
Mutual Agreement
The most straightforward way to exit a commercial lease is through mutual agreement between you and the landlord. If your landlord is willing to negotiate on termination (by you directly in the first instance, or by your lawyer if you are not successful), then terms can be documented in a deed of surrender. This document should outline the agreed-upon terms, including financial settlements (which might include things like re-letting fees or several months’ extra rent), any outstanding rent or outgoings payments, and property handover details.
Assigning or Subletting
Assigning or subletting your lease is another option. This involves transferring your lease to a new tenant who assumes your obligations. Depending on the terms of your lease and whether you have provided any personal guarantees or other security you may remain liable if the new tenant defaults, and in most cases landlord approval will be required. Depending on the circumstances you might engage a commercial real estate agent to help you find a suitable tenant.
Lease Break Clauses
In some limited circumstances commercial leases can include lease break clauses that set out conditions and procedures for early termination. These clauses are rare and may require specific notice periods, payment of a break fee, or other conditions – so seek legal advice early if you wish to explore this option.
Breach of Lease by Landlord
If your landlord breaches the lease agreement, such as failing to provide essential services or maintaining the property as agreed, you may have grounds for termination. Termination will not generally be the first option available to you to remedy a landlord breach so you should consult a lawyer to assess whether their actions constitute a breach and what remedies are available.
Conclusion
Exiting a commercial lease can be complex and needs to be approached methodically and with caution. Start by reviewing your lease agreement, and seek legal advice when necessary, to explore all available options. Negotiating with your landlord or finding a tenant to step into your shoes are often the preferred methods for early termination. Remember that each situation is unique – and to a certain extent will depend on the type of property involved.
Get specialist legal advice tailored to your circumstances to protect your rights and interests throughout the process. Speak to commercial property expert Bret Gower, Commercial Director at Smith and Partners on 09 837 6893 or email him bret.gower@smithpartners.co.nz.
