"Breaking Up Is Never Easy:" Five Ways To Break A Commercial Lease

September 14, 2022
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Commercial Real Estate

Author

Ella Segal
Ella Segal
Consultant

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The ongoing effects of the pandemic, hybrid working arrangements, and the threat of a recession are compelling more commercial tenants to consider offloading excess space or downsizing to smaller premises.

However, once a commercial lease is signed, both parties are bound by their obligations. So, what options are available to a tenant looking to get out of their lease?

When it comes to breaking a commercial lease, the odds usually aren’t stacked in a tenant’s favour. However, if you're in a bind, here are five options that may be available to you:

1. Subleasing

A commercial sublease is an agreement whereby a tenant who already holds a lease to a commercial property (sublessor) rents out all or part of their premises to a secondary tenant (sublessee), who treats the sublessor as their landlord. 

Provided your leasing agreement allows for it, subleasing can be a short-term strategy to reduce costs and increase cash flow. And it can enable a business to downsize within its current space or move on to larger premises without breaking lease and being hit with the associated costs.

However, it does come with some inherent risks, the most significant being the risk of default. Regardless of the wording of the sublease contract, as the original lessee, you’ll still be 100% responsible for the rent and other obligations outlined in your original leasing agreement. And that means you remain liable to the landlord if the sublessee stops paying rent or causes any property damage.

Most commercial leases require landlord approval of the sublessee and may prohibit subletting to companies already in the building or companies in similar industries to those already in the building. Subleasing is also likely to recuperate less than 50%-70% of the rent. So, it isn't the perfect solution for every business, and we advise tenants to seek professional advice before going down this road.

You can learn more about the pros and cons of subleasing here.

2. Lease assignment

Unlike a sublease, a lease assignment is when an entire space, including the existing tenant’s rights and responsibilities, is transferred to a new party. Here, the new tenant takes on the obligations of the assigning tenant under the original lease. 

Most commercial leases will allow for an assignment provided that the landlord consents and you find a suitable replacement that: 

  • Is financially secure and fit to take over the lease  
  • Accepts the terms of the original agreement
  • Meets certain conditions, for example, any permitted use clauses or personal guarantees

However, this can be a tough ask, especially if your current lease terms are not tenant friendly or are misaligned with current market rates. You'll also remain legally responsible for obligations under the original lease if the deed is not drawn up correctly. This can open you up to litigation if your replacement defaults or causes damages. So, tenants who choose this strategy are advised to partner with a professional.

3. Executing a break clause

While uncommon, a well-negotiated lease may include an early termination clause (a.k.a 'break clause’), which allows for early exit before the end of the lease term. Though most landlords are reluctant to negotiate one of these, if it's in your contract, it will stipulate the terms of exiting the lease early, including the required notice period and other conditions. 

We advise tenants to seek professional advice before actioning a break clause, even if the process seems straightforward. That's because the wording of these clauses is paramount, and you must strictly carry out the conditions for it to succeed. 

It's also worth noting that once you've issued notice, you'll be unable to withdraw it unless the Landlord agrees. And if this happens, a new lease will be executed from the expiry of the break notice. Depending on the wording of the clause, you may also need to pay associated landlord costs, including legal fees or rental payments, while your Landlord finds a new tenant.

4. Hand back provision

Another uncommon provision that may be contained in a well-negotiated lease is a “hand-back clause”, which enables the tenant to give back a portion of space at a juncture through the lease term. For example, we recently worked with a client who had approximately 700sqm of office space and was able to give back 200sqm after 24 months.

This gives a commercial tenant the flexibility to downsize without having to relinquish their entire space or pay the costs associated with subleasing, assigning or surrendering space.

5. Lease surrender

Sometimes, paying out your lease term may be the only choice. And in this case, tenants can approach the Landlord and request a lease surrender. 

The terms are open to negotiation and need to be documented in a 'deed of surrender,' which is a legal document that formally ends the relationship between you and your Landlord. 

If commercial tenants go down this path, they should expect to pay 80-100% of the remaining term, cover the Landlord's legal costs, meet specified preconditions and any 'make good' obligations.

Lease surrender is considered the worst-case scenario and may happen, for example, in the event of business closure where there's no way to arrange an assignment or sublease. The high cost associated highlights the importance of seeking the help of a professional before entering into any commercial arrangement or taking steps to break an existing lease.

Looking to break your commercial lease? Get a tenant rep on your side

Whether you're looking to downsize, grow or relocate to a better premises, there are various options you can explore to break a commercial lease. In some circumstances, there may even be options available to you that fall outside of those outlined here.

However, the process of breaking a commercial lease is never easy. And the success of your lease exit strategy hinges on current market conditions, the terms of your lease and your plan of attack. What's more, even if you have a great relationship with your landlord, if you plan to break your lease, the process can be as messy as a divorce. ​​So, it pays to have a professional in your corner.

Tenant CS is an independent tenant advisory firm that exclusively represents tenants in commercial negotiations. We empower tenants in leasing transactions, act as an intermediary between you and your landlord, and know how approach lease exits in a way that mitigates your risks and losses. 

So, if you're thinking about how to break your commercial lease, contact a member of our team to see how we can help you!

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