Retail / Commercial Leases during the pandemic
Though the CTRS and the Victorian Government’s Jobkeeper Payment Scheme ended on 28 March 2021, lockdowns continue to remain a very real part of every Victorian’s life. Many small and medium businesses have been forced to shut their doors, making it difficult to recoup their losses from the past 1.5 years. While the Government has recently announced a new rent relief scheme that will apply retrospectively from 28 July 2021, we continue to experience a noticeable increase in enquiries from business owners wanting to know if they can terminate their lease in order to minimise their losses.
A lease is a legally binding contract between the landlord and the tenant. Should a tenant wish to terminate their lease early, such will be viewed as a breach of contract, and the landlord may technically be entitled to claim the entire remaining period in rent from the tenant.
Fortunately, there are a couple of methods that you could consider to avoid such a claim from the landlord. As every landlord-tenant relationship is unique, we at Madison Marcus Law Firm could assist you to navigate your circumstances, evaluate your options and execute your most suitable course of action.
Steps to take
1. Check the terms of your lease agreement
If you are thinking of terminating your lease early, the first step would be to check your lease agreement.
Although it is uncommon, some lease agreements contain a “break clause (or early termination clause)”, which sets out the process (as well as costs, if any) involved for you to break your lease early.
It is regular practice for the landlord to require you to cover legal costs of documenting the termination and rent payments until a new tenant takes over your lease.
For new leases and lease renewals and variations, tenants could consider negotiating such a clause to be included, as well as the terms of the early termination prior to execution, prior to entering into the lease.
2. Communicate with your landlord
Bear in mind that your lease agreement is essentially a contractual relationship between you and your landlord, which both of you have agreed on at the time of signing the terms of the lease.
For this reason, it is important to maintain good communication with your landlord, especially if you are worried that you are unable to meet your rent payments on time. If you are thinking of terminating your lease early, you should approach your landlord and seek their consent to do so.
The landlord is not legally bound to agree to your request. However, the terms of the termination are open to negotiation between the both of you, including:
- Settlement lump sum
- Ask yourself if you have a security bond with the landlord and if you are willing to give this up
- Other costs involved such as legal fees and rental payments until the date a new tenant takes over the lease
- Whether repairs to the premises are required and who will bear those repairs
If you manage to come to an agreement with your landlord regarding early termination, ensure that those terms of your agreement are documented within a Deed of Surrender. Under a deed of surrender, your legal obligations under the lease will come to an end.
There may be risks involved. The landlord is not obligated to agree to your proposal to terminate the lease immediately, therefore, if you are paying for rent and the landlord’s legal costs during the negotiation process, your ongoing costs could really start to snowball. It is not uncommon for landlords to drag the negotiation process for months on end. My recommendation is to NOT put all your eggs into one basket and start looking for a new tenant to take over the lease even while the negotiation with the landlord is on foot (see next section).
3. Look for a new tenant (Assignment of lease)
If you could find a new tenant to take over your lease, you may be able to negotiate an early lease exit without having to pay a huge lump sum to the landlord (avoid the landlord claiming against you for rent payments until the end of your lease term as specified in your lease agreement).
Note that any prospective new tenant must be consented to by your landlord. Therefore, just because you have found someone willing to take over your lease does not mean that your landlord will agree to the lease transfer (assignment of lease). Commonly, your landlord could require the following before giving their consent:
- The prospective new tenant must provide evidence of their financial strengths and business skills (e.g. financial statements of the business, written statements from their referees, the director’s personal income and assets statement).
- That the prospective new tenant be prohibited from changing the permitted use of the premises under the lease agreement.
- The prospective new tenant must be willing to give a personal guarantee.
- That you first fulfil all your obligations under the lease (and make good all breaches, if any).
Often, the process of finding a new tenant could take months, especially if the landlord turns down the prospective tenant(s) that you found.
If your landlord has consented to the new prospective tenant, you should document the terms of your agreement with the landlord in a Deed of Assignment. Under this deed, you will assign your rights and obligations under the lease to a new tenant. However, as the original lease is still continuing under the new tenant, the old tenant (you) may well continue to be liable for the actions of the new tenant. In the event of a breach by the new tenant, the landlord may be entitled to claim against you. For this reason, please pay attention when you are negotiating the terms of the Deed of Assignment.
4. Look for a subtenant
Another relatively common arrangement is a sublease arrangement. Under a Sublease, you will remain as the tenant of the lease, but the subtenant will bear the cost of the rent for/with you. Similar to an assignment to a new tenant, you will require the landlord’s consent if you wish to sublet the premises.
This option affords you greater flexibility as you do not have to leave the premises or sublet the entire premises to the subtenant. Depending on your needs, you could sublet the entire premises, or a portion, to the subtenant. The subtenant will pay for rent accordingly.
Importantly, your obligations under the lease as the tenant will continue. The landlord could legally make a claim against you for the actions of the subtenant. For example, if the subtenant defaults on rent under the sublease, you will remain liable to the landlord for the entire amount of rent under the lease, including the amount that should be paid by the subtenant. In order to protect yourself, you should ensure the Sublease agreement is formally documented so that you could seek compensation from the subtenant if that happens.
Licensing is an option if you still need to use your premises from time to time. You may consider granting a licence to another party to allow them to use part (or all) of the premises under limited circumstances. You will still be able to use the premises and share it with the licensee. Please note that the landlord’s consent will be required for a licensing arrangement.
There are many conditions to think about in setting up a licence arrangement, such as duration, exclusivity and scope of the licence, the liability of parties for misuse of premises (breach of the lease) and commercial considerations such as calculation of the royalties or fees to be paid by the licensee.
It is not easy to terminate a lease early. Often, landlords tend to require the tenant to pay an onerous lump sum to cover all rent payments until the date of lease expiry before they agree to let their tenant exit their lease.
If you have attempted the above suggestions and you still are unable to resolve your dispute with your landlord, you could consider bringing your dispute to VSBC for mediation. Note that the VSBC are currently high volume of cases due to COVID-19 related enquiries.
- Depending on your specific lease agreement and your other circumstances, your lease may be governed by retail leases legislation. This may impose additional requirements on you and your landlord. A good indicator is to check whether you are using your premises for “retail purposes” under the Retail Leases Act.
- But be careful…if you previously signed a Deed of Rent Relief under the CTRS, then pay attention to the terms of the Deed of Rent Relief. Some Deeds contain terms of rent relief which are conditional upon the tenant maintaining all their other obligations under the lease, i.e. no termination, no breach, no assignment.
- YOU MUST to the best of your ability still continue to fulfil all of your obligations under the lease, including making all your rent payments on time. It is more helpful to approach a negotiation with your landlord on terms of early termination/surrender of lease with clean hands. This also shows your willingness to enter into discussions with good faith. If your business is unable to afford rent, please consider reaching out to your landlord sooner rather than later.
- If you default on your rent payments, the landlord could not only be entitled to terminate your lease and evict you, but also continue to claim back all losses and damages against you, including legal costs, interest and rent payments until the end of your lease term. However, the landlord is also obligated under law to mitigate its losses by proactively taking steps to re-let the premises in a timely manner.
Our team of experienced commercial lawyers are now offering a 30 minute complimentary review of your lease, so do reach out to Madison Marcus for assistance if you wish to find out more about your specific situation.