Exiting a Lease: Options and considerations for tenants

Grounds for Termination

Tenants may have several options to get out of a lease early, depending on the terms and applicable circumstances including:

1. Mutual Agreement: Both parties can agree to terminate the lease early. This agreement should be documented in writing to avoid future disputes and where possible include a full release of all historic and future obligations.
2. Break Clauses: Some leases include specific clauses that allow for early termination. Break clauses will often require specific notice periods and have a number of pre-conditions attached to them so it’s always a good idea to get advice on how to exercise a break option well in advance of the break date.

Alternative Solutions

If terminating the lease is not feasible, you could consider alternative solutions, such as:

1. Assignment: Assigning a commercial lease involves transferring the tenant’s rights and obligations under the lease to a new tenant (the assignee). Most leases limit assignments and impose a number of pre-conditions and even where it is permitted it is usual for a tenant to have to get written consent from the landlord, and cover their legal fees.

Benefits of assigning –

• It’s a complete transfer of obligations: Assignment largely allows the original tenant to transfer all lease obligations to the assignee, freeing them from future responsibilities (although do check out my colleague Myles Shearman’s article regarding Authorised Guarantee Agreements (AGA’s)!).
• Financial relief: It provides an opportunity to exit the lease without incurring penalties for early termination.
• Flexibility: Assignment offers flexibility for businesses that need to relocate or downsize.

Challenges of assigning –

• Landlord approval: Obtaining landlord consent can be challenging, especially if the lease has strict assignment terms.
• Finding a suitable assignee: Identifying a reliable and financially stable assignee can be time-consuming.
• AGA’s): Some leases may hold the original tenant liable under an AGA if the assignee defaults, so it’s important to clarify liability terms.

2. Subleasing: If you can’t find anyone to take your lease on you could look at becoming a landlord and renting out your space to a third party.

Some leases may prohibit subleasing so the provisions of the lease should be checked carefully. Even if the lease allows subleasing, much like with an assignment it’s often necessary to get written consent from the landlord and tenants should again expect to have to cover the landlord’s legal fees.

Benefits of subleasing –

• Reducing costs: Subleasing can help cover rent and other expenses, reducing the financial burden on the original tenant.
• Flexibility: It can be easier to find a subtenant than it is to find someone willing to take your lease on by way of assignment.
• Maintaining lease obligations: Subleasing allows the original tenant to fulfil their lease obligations while transferring day-to-day responsibilities to the sublessee.

Challenges of subleasing –

• Landlord approval: Obtaining landlord consent can be challenging, and costly especially if the lease has strict subleasing terms.
• Liability: The original tenant remains liable for the lease, meaning they must ensure the sub-tenant complies with all lease terms. You will also need to pay the rent regardless of whether your tenant has paid you.
• Finding a suitable sublessee: Identifying a reliable and financially stable sublessee can be time-consuming.

3. Lease Variation: It’s always possible to negotiate with the landlord to modify the lease terms, such as reducing the rent or extending the lease term, to better suit your needs – as the saying goes if you don’t ask you don’t get!

Exiting a commercial lease requires careful consideration and advanced planning.

If you’re unsure where to start, want to double check your lease gives you the flexibility you need, or just want to talk about the process, I’m always happy to have a chat.