No longer need the type or size of your current premises? Has your business changed due to Covid-19 and employees wanting to work from home? Perhaps your business is growing so fast you require additional space to keep up business operations?

If so, you might be wondering what your options are for ending your lease obligations.

If you want to end your lease obligations entirely, this will likely require you to negotiate with the landlord and come to an agreement. A failure to do so is a breach of contract.

Don’t just stop paying rent. If you do, your landlord can pursue what they’re owed, including enforcing any guarantees stipulated in your lease agreement.

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Negotiating an exit payment

If you want to get out of your lease, the starting point is to have a look at the termination clauses in your lease.

Most commercial leases won’t allow the tenant to end a lease prior to the termination date unless something exceptional occurs - for example, the expiry of a ‘no access’ period after an emergency such as an earthquake.  

If you’re set on an early exit from your lease obligations, you need to bear in mind that the landlord is not required to agree to this request.

Often, they’ll only allow it if you make an exit payment. An exit payment might be substantial, and will depend on factors such as:

• Any specific lease terms
• The size of the premises
• How long is left on the lease term
• Incentives provided by the landlord (like fit-out contributions)
• The amount of rent
• The ease of securing a replacement tenant
• Current market rent for the premises

If you can negotiate an exit payment, it can mean a clean break from the lease obligations. However, it can be a significant cost. It pays to have an experienced property lawyer on your side to get the best result.

Assigning the lease

Another option is to find a tenant who will step into your shoes and take on the lease obligations. This is known as an "assignment" of lease, and it will require your landlord’s consent.

While the landlord has some discretion, they also can’t unreasonably withhold consent provided the incoming tenant (known as the ‘assignee’) is respectable, responsible and financially stable enough to pay rent and outgoings.

To formalise the assignment, a written Deed of Assignment needs to be completed and signed by all parties.

This approach has the advantage of not requiring a lump sum exit payment, but finding a solid tenant willing to take on your lease may not be easy.

It’s also important to note that when you assign your lease, you’re not fully absolved of your obligations. If the assignee defaults on the lease obligations, responsibility will fall back on you to cover any shortfall or default.

Typically, where the lease is assigned, liability continues for the current term of the lease but not into any renewed terms. Where you do pursue an assignment, you can reduce your risk by negotiating with the landlord to cap this ongoing liability to a certain amount or for an agreed period. However, the landlord is not obliged to agree to anything.

Subleasing the premises

If you still want to keep some of the premises for your business but don’t need all the space you’ve leased, you can sublease a portion of the premises.

A sublease differs from an assignment of a lease in that you’ll still be responsible for all of the lease obligations, but a subtenant is also occupying the premises and paying a contribution towards the rent. A sublease should detail how responsibilities relating to the lease are shared (e.g. internet, insurance and other utilities).

You will effectively become a landlord yourself for the portion of space you sublet. It pays to investigate the sublessee thoroughly to make sure they won't do anything dubious that might raise your risk exposure. One way of reducing your risk is to get a personal guarantee from the sublessee.

Entering into a sublease will still require consent from the landlord and, as with assignment, this consent may not be unreasonably withheld. The landlord will want to ensure that any sublessee is responsible and complies with the requirements of the original lease (the ‘Head Lease’). If the sublessee has a business use that’s different from what the Head Lease outlines, you will have to negotiate with the landlord to alter this, which may mean increased costs.

As with all property agreements, a sublease should be clear with respect to each party’s obligations and formally documented in a Deed of Sublease to avoid any ambiguity.

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Are you considering exiting your lease or reducing your lease overheads? NZ Legal can help you restructure and negotiate to get the best lease moving forward. Get in touch by completing the form below.

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