Surrendering a retail or commercial lease

How can a tenant surrender or exit a lease before the end of the lease?

Ending the lease before the lease term expires will require a mutual agreement to be reached between the landlord and the tenant.

There are two ways for a tenant to get out of a retail or commercial lease:

1. Negotiate with the landlord to get their agreement to be let out of the lease obligations

Usually an early exit of the fixed term by a surrender of the lease would be agreed by the landlord in exchange for a financial settlement or ‘break lease fee’. The surrender of lease is usually a formal document or deed.

2. Find another tenant to take over the lease

This would often mean an assignment of the existing lease to a new tenant, but could also be a surrender of the current lease, with a new lease entered into between the incoming tenant and the landlord. An assignment of the lease could also allow the sale of the business but would require the property owner and their mortgagee to approve the new tenant.

What strategies can help a tenant wanting an early exit from their lease?

Negotiate with the landlord as soon as issues start. Having a conversation early to address issues will help prevent matters escalating and could save time and costs overall. Consider using a neutral third-party mediator to facilitate the negotiation.

  • Look for a new tenant yourself
  • Agree to pay the costs of getting a real estate agent to find a new tenant
  • Try to sell the business and assign the lease (noting sections 39-43 of the Retail Leases Act 1994, for retail tenants)
  • Consider sub-leasing the whole, or a part of, the premises, with consent of the landlord
  • Consider using a neutral third-party mediator to assist with exploring your options with the landlord.

As a tenant, can I just walk away?

Abandoning the property carries a lot of risk for a tenant.

If there are personal guarantees in place, they risk losing their house and any other assets.

Walking away from the lease obligations without negotiating will make it very difficult to make any arrangements with the at a later stage.

The tenant will lose control over the shop and everything in it, which may also expose them to actions from others who have things locked inside the premises – this could be equipment under finance or the belongings of staff or customers.

It also presents a security risk to the property, further exposing the tenant to financial risk. A landlord would be entitled to sue for the rent payable for the balance of the lease term. A tenant’s obligation to pay rent under the lease contract is an express term of the lease and not voidable in a commercial contract for hardship reasons. While there is an obligation for the landlord to mitigate these losses, however debt owed by the tenant will continue to accrue until a new tenant leases the property.

What are the main steps in a surrender of lease?

Negotiate terms and formalise the arrangement. The parties should negotiate the terms, using a neutral third-party mediator if they cannot reach agreement themselves. 

As the risk and consequences can be high, both parties should consider using lawyers.

Terms of surrender are best settled by a deed, which is a special kind of written agreement that meets certain legal requirements. There is a risk with alternative ‘informal’ agreements that they may be open to a legal challenge and overturned. An executed lease surrender deed is the best way to ensure that the agreement reached is a full and final settlement of all obligations that arise under the lease.

If the lease is registered, then the Registrar-General (of the land title system) can remove the lease from the certificate of title with a Surrender of Lease form.