A substantial benefit to retail and commercial leases is that they provide a fixed term meaning a lessee is given a set amount of time to occupy the premises. However, either party to a lease may be able to terminate it earlier. It is important to understand when either party may terminate a retail or commercial lease and whether there will be any penalties for terminating.
A Lessor has an ability to terminate the lease on certain grounds including:
- Lessee’s Breach of the Lease – a lessor will have a right to terminate the lease if the lessee breaches a term of the lease agreement. For the lessor to have this right, the lease must include a clause allowing the lessor to terminate the lease. The lease clause may also restrict which breaches may amount to the lessor’s right to terminate the lease.
- Demolition of Premises – a lessor may terminate a lease if the owner decides to demolish the building where the lessee’s premises are situated. Terminating a lease based on a demolition clause should be a last resort. It should only be used if it is not possible for the demolition of the building to take place unless the lease is terminated and the lessee vacates their leased premises.
- Refurbishment or Relocation – a clause may be included in the lease allowing a lessor to terminate the lease as a result of refurbishing or refitting the lessee’s premises. Instead of terminating the lease, the lessor may offer to relocate the lessee to a different premises.
A benefit to the lessee is that most of the above grounds for termination requires it to be included in the lease. The is particularly important for commercial leases as there is no particular commercial leases act. Ultimately if the provision are not included in the lease, then the lessor cannot rely on them to terminate the lease.
If a lessor is seeking to demolish a building and as a result terminating the lessee’s retail lease, then the Retail Shop Leases Act 1994 (Qld) imposes requirements on the lessor. The lessor must give the lessee 6 months written notice stating details of the proposed demolition and the day the lease will be terminated. A lessor may also be required to compensate the lessee for damages sustained because of fit out works undertaken. There are some circumstances where the lessee may be compensated for damages sustained by the lessee because of early termination. This will only extend to situations where the demolition was not carried out within a reasonably practicable time after the termination date of the lease.
If the lessor intends to relocate the lessee’s premises, the Retail Shop Leases Act 1994 (Qld) requires the lessor to provide a lessee a written relocation notice. The notice most provide:
- sufficient details of the refurbishment work that will be undertaken;
- details of the alternative premises which must be comparable to the original premises; and
- the relocation date must be at least 3 months after the notice.
A lessee also has options for terminating the lease, including:
- Early Termination Clause – a clause may be inserted in the lease allowing either the lessor or lessee to terminate the lease before the lease end date. Typically, the clause will impose some sort of penalty for terminating the lease early (for example, if the lessee terminates early, then the clause may require the lessee to pay rent until a new lessee can be found).
- Lessor’s Breach – if the lessor breaches a term of the lease, the lease clauses may allow the lessee to terminate the lease. The lessee must look at the lease clauses to see if they allow the lessee to terminate as a result of the lessor’s breach.
- Mutual Agreement – both parties agree to end the lease early. The lessor may provide a penalty for agreeing to terminate the lease (for example a surrender fee), as there is no obligation on either party to agree to end the lease early.
- Misrepresentation by Lessor – the lessee may have a common law right to terminate the lease if the lessee can prove that:
- The lessor made a false representation to the lessee which the lessee relied on when signing the lease;
- The lessee suffered a detriment as a result of the false representation; and
- It was reasonable for the lessee to rely on the false representation; and
- The lessee would not have entered into the lease if they knew the representation was false.
Failure to Terminate Lease Properly
If either party terminates the lease improperly, they will have to compensate the other party for the losses they suffered due to the improper termination. This will not just include rent and outgoings but may also extend to:
- compensating the lessee for having to locate a new premises; or
- the lessee having to compensate the lessor for advertising the premises to bring in a new lessee.
Alternatives to Terminating
If a lessee is looking to get out of their lease, there are options other than terminating including:
- Assigning the Lease – the lessee transfers their rights and obligations under the lease to a new lessee. The benefit of assigning a lease is that it allows a lessee to exit out of the lease earlier than the end date while the lessor still has the lease on foot, but it is with a new lessee. Lease clauses typically allow the ability to assign the lease and will also provide the requirements the lessee must meet in order to do so (which will always require the lessor’s approval); or
- Sub-Leasing the Lease Premises – the lessee will transfer some of their interest in the lease and premises to another third party. This may be ideal for a lessee who wishes to remain in the premises but wants to reduce costs, as a sub-lessee can assist with paying the rent. A new agreement will arise between the existing tenant and the new tenant. The existing tenant will be responsible for the new tenant, as well as their own actions while in the leased premises.
If you have any questions or require assistance with drafting, renewing or drafting your lease in Queensland, then please contact the property team at My Property Protect for more information.
Kayleigh Swift, Associate
Chloe Skubis, Graduate Law Clerk
About the authors
Kayleigh Swift is an associate in our Commercial and Property team who assists with Employment Law matters. With a high level of experience in commercial and retail leasing, voluntary and involuntary purchase and sale acquisitions, property development and employee relations, Kayleigh provides practical advice to ensure smooth business transactions.
Chloe Skubis is a Graduate Law Clerk in our Property team who assists with various conveyancing transactions. Chloe is very experienced in residential conveyancing and is a problem solver. She always provides efficient service to all her clients.
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