Entering into a lease is a significant legal and financial commitment for both the landlord and tenant. Whilst a lease agreement typically tries to contemplate anything that can go wrong during the term of the lease, circumstances can change quite dramatically over the course of a few years. If the landlord-tenant relationship breaks down, but they cannot reach an agreement about ending the lease early, then their respective rights to terminate the lease and obligations can become contentious issues resulting in costly legal battles. For this reason, it is critical to understand the risks and consequences of improperly terminating a lease. Additionally, you should understand:
- what options are provided to you by the lease agreement or the general law; and
- how to record the termination.
This article will discuss ways of terminating a retail or commercial lease.
Contractual Rights to Terminate
The first step in understanding if you have any options to terminate a lease is to look at the lease agreement itself.
Here are some common provisions regarding termination that a lease agreement may contain:
1. Early Termination (Unconditional)
The landlord and tenant can agree to end the lease early so long as they record this agreement in writing.
2. Early Termination (With Notice)
The tenant or landlord can terminate the lease at any time, but the termination will only be effective after a minimum period from first notice, called the ‘notice period'.
3. Termination for Breach (Immediate)
The landlord or tenant may terminate the lease if the other commits a major or serious breach of the lease, such as causing significant damage to the premises, becoming insolvent/bankrupt or committing illegal or dangerous acts.
4. Termination for Breach (With Notice)
The landlord (or in some unlikely cases, the tenant) may terminate the lease if the other commits a minor or non-serious breach of the lease and they do not remedy this breach within the given notice period. These types of provisions typically cover non-payment of rent.
5. Termination for Non-Disclosure (Retail Lease)
In some states or territories, the tenant can (for a limited period after the lease begins) terminate the lease if the landlord has not complied with any disclosure requirements.
6. Surrender Clause
The tenant can surrender (give up) their rights to the lease early provided they compensate the landlord for lost rent, commonly referred to as a ‘surrender fee'.
7. Early Termination (Contingent)
The lease will (or may) end if an agreed event, such as refurbishment or renovations within, does not happen within the prescribed time frame.
8. Early Termination (Pre-Conditional) or Break Clause
The tenant can end the lease early so long as they satisfy a pre-condition imposed by the landlord, such as surpassing a minimum rental period or agreeing to enter into a lease for a different property with the landlord. The landlord may charge a ‘break fee'.
9. Termination (Refurbishment or Demolition)
The landlord can terminate the lease if they plan to undertake significant refurbishment of the premises or demolish the premises. The landlord may be required to give adequate notice, or even compensate the tenant for relocation costs and other expenses to comply with applicable laws.
NOTE: the landlord commonly prepares lease agreements. They will generally give more favourable rights to the landlord and less favourable rights to the tenant, unless the terms of the lease are negotiated otherwise.
Some lease agreements are likely to have combinations and further variations of the above provisions based on the commercial relationship. In addition, disputes can arise between the landlord and tenant over the interpretation of termination provisions. Therefore, it is important that you clearly articulate any conditions or ‘triggers' of any rights.
HINT: tenants in retail leases generally have better protection and rights granted by the relevant laws when compared to tenants of commercial leases. The extent of those benefits differs between Australian states.
Mutual Surrender of Lease
One way to terminate a lease is for the landlord and tenant to agree to end the lease early (referred to as a ‘mutual surrender'). In negotiating a mutual surrender, it is important to clarify the process and terms of that surrender.
Key items to consider for landlords and tenants negotiating a termination include:
- how much rent and utilities the tenant will need to pay before and after the proposed termination date;
- when the tenant has to remove their property and give back the keys to the premises;
- what the tenant's responsibilities are to fix up or refurbish the premises back to its original condition (‘make good');
- if the termination is conditional on the tenant not breaching the lease until the proposed termination date;
- if the termination is subject to any third-party approvals;
- whether the tenant will have any ongoing liability to the landlord for damage to the premises. Or, if the landlord will ‘release' the tenant from all claims;
- whether the landlord will have any ongoing liability to the tenant relating to the state of the premises or other conduct, or if the tenant will ‘release' the landlord from all claims;
- when the security deposit or bank guarantee will be returned;
- how the costs of preparing any paperwork to terminate the lease will be split; and
- what the stamp duty and other tax considerations are of terminating the lease.
Deed of Surrender of Lease
Once the terms of the termination are agreed upon, the landlord and tenant should prepare a deed of surrender of lease. It will set out their rights and obligations, as well as the process for termination by surrender. In many cases, emails or text messages are not capable of properly and legally surrendering a lease. Therefore, a signed document is generally recommended.
HINT: some states and territories provide guidance or sample documents on recording a surrender of a lease.
Termination Following Abandonment/Repudiation or Misrepresentation
Abandonment and Repudiation
Under general contract law, if one party to a contract acts in a way that shows they no longer intend or wish to be bound by their contractual obligations, the other party can allege that they have abandoned and walked away from their obligations. This is called ‘repudiation' and gives the innocent party a right to terminate the contract.
In a leasing context, this can occur in several different ways, such as either of the following:
- Example 1: the landlord discovers that the tenant has abandoned the property by removing their equipment, has ceased paying rent and is ignoring the landlord's legitimate requests and demands without any legal basis or genuine reason to do so. These acts are inconsistent with the tenant's obligations. Therefore, the landlord might argue that the tenant has repudiated the lease, and the landlord may terminate it.
- Example 2: the lease imposes various obligations on the landlord, such as to make structural repairs or conduct maintenance. The tenant makes several genuine requests to the landlord to comply with their obligations, but the landlord fails to respond to or act upon these requests without reasonable excuse. The tenant might argue that the landlord has committed the repudiation and immediately terminate the lease.
Note: providing repudiation is more difficult than showing a simple breach. Further, it may require additional evidence or consideration of the relevant conduct and any patterns of behaviour on a case-by-case basis.
Misrepresentation by Landlord
A tenant may be able to terminate a lease by relying on general principles of the law if they can prove that:
- they signed the lease in reliance upon statements or representations made by the landlord;
- it was reasonable for the tenant to rely on those statements or representations;
- those statements or representations turned out later to be false or misleading;
- if the tenant had known the truth, they never would have signed the lease; and
- whatever loss the tenant has suffered cannot be compensated for financially.
Proving a misrepresentation has occurred is difficult. It often requires clear written or verbal communication with certainty about promised actions (such as renovations or upgrades).
TIP: courts will view any reliance by the tenant through objective standards and will determine what was ‘reasonable'.
Landlords generally have much stronger rights to terminate a lease. Therefore, it would be less common (but not impossible) for a landlord to allege misrepresentation by a tenant resulting in the landlord's right to terminate.
Consequences of Improper Termination
Terminating a lease without having a clear contractual or legal right to do so (such as by repudiation or clear reliance on misrepresentation) can result in you having to compensate the other party for losses they have suffered due to the termination.
Suppose a tenant improperly terminates a lease. In this case, they may be liable to the landlord. They will often be liable for rent, utilities and other costs associated with the improper termination, including legal or advertising costs. This liability for ongoing payments under the lease may even continue until the landlord finds a replacement tenant.
Conversely, improper termination by a landlord can result in business interruption and financial losses for the tenant. Additionally, improper termination may result in the landlord owing compensation.
NOTE: if the landlord or tenant claim they have suffered financial loss due to improper termination, it is key that they take steps to try and minimise this loss as much as possible. Otherwise, the loss they claim may be reduced. This concept is known as ‘mitigation of loss' and can include taking genuine steps to find a replacement tenant or premises as soon as possible.
Terminating a lease requires careful consideration of the rights and obligations of the landlord and tenant to end the lease. The lease agreement may contain provisions allowing either party to terminate the lease. However, these provisions may have conditions attached or require particular events or triggers to occur before termination can occur. Landlords and tenants can also reach a mutual agreement to surrender the lease. Further, they should record the commercial terms of this termination in a formal deed of surrender.
Repudiation is where a tenant or landlord abandons or walks away from their obligations under a lease, and this can allow the other party to terminate the lease. Terminating a lease due to reliance on misrepresentations can be available for tenants (mostly) if such reliance was objectively reasonable. If one party improperly terminates the lease without a contractual or legal right, they can be liable to the other for compensation of financial losses.
Frequently Asked Questions
What are some options for terminating a lease?
Depending on the circumstances, you may be able to terminate the lease early, terminate for a breach of contract, terminate for non-disclosure or for refurbishment or demolition. Read the description of each option of termination above to decide whether it may apply to your circumstances.
What is repudiation?
If one party to a contract acts in a way that shows they no longer intend or wish to be bound by their contractual obligations, the other party can allege that they have abandoned and walked away from their obligations. This is repudiation of a contract.