Commercial Property: Early Termination

If you’re a Commercial Landlord and your Tenant wishes to terminate the Lease before the term of the Lease has come to an end, you have a few different options to consider as to how to best proceed while protecting your interests.

Some Deeds of Leases have an early termination clause. It is always important to first check if your Deed of Lease sets out a process to terminate the Lease early, and any conditions that the Tenant would have to meet to do so.

If your Deed of Lease does not have any early termination provisions, the Tenant legally has no right to terminate before the Lease term comes to an end. As a Landlord, you are not obligated to accept a request for early termination of the Lease. However, should you and the Tenant come to an agreement, it is possible to do so. Depending on how you wish to proceed you may want to negotiate either that the Lease is terminated early, and the Tenant surrenders the lease, or that the Tenant assigns the Lease to a new Tenant. There are positives and negatives to consider with each approach.

Early Termination of Lease

In terminating the Lease early, there is a risk of loss of rent between the time of termination of the Lease, and the commencement of the Lease with a new Tenant. If the termination places you in a disadvantaged position, you can negotiate with the Tenant as to conditions for terminating the Lease early. For example you could request that:

a. Tenant pays the reasonable marketing and agent costs you incur in finding a new Tenant, so long as you can show that you are making your best efforts to find a new Tenant as soon as possible.; and/or

b. The Tenant pays an early termination payment; and/or

c. That the Tenant be responsible for paying your reasonable legal fees incurred as a result of this early termination of lease, as well as the costs to draft and negotiate a new Deed of Lease with a new Tenant.

As the term of the lease would come to an end, the Tenant would have the responsibility to make good the premises. This includes the removal of chattels, and their own fixtures and fittings, the repair of any damage to the premises, and the obligation to quietly yield the premises at the determination of the Lease in the same clean order, repair, and condition as it was on the commencement date

Assignment of Lease

Another possibility instead of an early termination of the Lease is that the Tenant arranges an assignment to a new Tenant. This would be subject to your approval of the tenant as a solvent, responsible, and reputable entity/persons. The Deed of Lease would then remain in effect, and there would be a transfer of the lease terms pursuant to a Deed of Assignment of Lease. If there was an assignment, rent and outgoings would continue to be paid by the existing tenant to the date of transfer/assignment and with the new tenant assuming the new tenant assuming all responsibilities of the existing tenant thereafter.

An assignment also allows you to revert to the outgoing tenant in the event of any default made by the new tenant for the original term of the Lease. It is also worth noting that, under clause 33.1(e) of the current Auckland District Law Society Deed of Lease, the Tenant is responsible to pay your reasonable costs incurred in respect of approving and preparing the necessary documents to affect the Assignment of Lease.

As a Landlord, it can be risky to allow the early termination of a Lease without having a new Tenant lined up to occupy the premises. We always advise connecting with a lawyer to discuss your circumstances and make sure that you are aware of all of your options.

If you would like more information, or help with a Lease matter, please contact Sutcliffe Matson Law on 09 279 8351.