How do I get out of a commercial lease early in Australia?

Nikolina Milošević
6 days ago
5 min read

You can get out of a commercial lease early in Australia, but not unilaterally. Your options depend entirely on what your lease says, what your landlord will agree to commercially, and whether you have a buyer for the business or the space. The three most common exit routes are assignment, subletting, and surrender, and each has its own risks, costs, and landlord consent requirements.

If you are trying to exit a commercial lease, the first thing to do is stop. Do not tell the landlord you are leaving, do not hand back the keys, and do not stop paying rent. Each of those steps can put you in breach of the lease and give the landlord grounds to take action against you for the entire remaining term.

Why early exit is difficult

A commercial lease is a fixed term contract. The tenant has agreed to pay rent for the entire term, and the landlord is entitled to receive it. There is no automatic right to exit early. Unlike residential tenancy law, commercial leasing does not give tenants a statutory escape route for hardship, a change in circumstances, or even the failure of the business.

If you simply stop paying rent or vacate the premises, the landlord can treat the lease as repudiated, sue for the remaining rent, enforce any personal guarantee, and pursue your personal assets. The consequences can be significantly worse than staying in the lease.

If you are thinking about exiting your lease, get advice before you do anything. Book a Strategy & Advice Consult.

Option 1: Assignment of lease

Assignment is where the tenant transfers the lease to a new tenant, usually a buyer of the business. The new tenant steps into the outgoing tenant's shoes and takes over the lease from that point forward. The outgoing tenant is released from future obligations, although in some leases they remain liable as a guarantor.

Assignment is the most common exit route for tenants who are selling their business. The buyer wants the premises. The landlord wants an acceptable replacement tenant. The outgoing tenant wants to exit cleanly. Where all three align, assignment works well.

Assignment requires landlord consent, and the grounds on which the landlord can refuse consent depend on the lease. Some leases require the landlord to act reasonably. Others give the landlord broad discretion. The financial strength of the proposed assignee is usually the central consideration.

In a retail lease, there are additional protections for tenants around landlord consent to assignment. The landlord generally cannot unreasonably withhold consent, and there are time frames within which the landlord must respond.

Option 2: Subletting

Subletting is where the tenant grants a sublease to a third party who occupies the premises, while the head lease between the tenant and landlord remains in place. The subtenant pays rent to the tenant, who continues to pay rent to the landlord.

Subletting can be a useful option where the tenant wants to reduce their costs without fully exiting the lease, or where the tenant is not ready to give up the lease entirely. It also works where only part of the premises is being vacated.

The key risk with subletting is that the tenant remains liable to the landlord for the full rent and all other lease obligations. If the subtenant fails to pay, the tenant still has to pay. If the subtenant breaches the lease, the tenant is still responsible.

Subletting requires landlord consent in almost all commercial leases, and some leases prohibit subletting entirely.

Option 3: Surrender of lease

Surrender is where the tenant and landlord agree to terminate the lease early by mutual agreement. The lease ends, both parties are released from future obligations, and the premises are returned to the landlord.

Surrender is entirely consensual. The landlord is under no obligation to agree and usually will not agree without a commercial incentive. That incentive is almost always financial. A surrender payment, sometimes called a break fee, is paid by the tenant to the landlord as compensation for agreeing to terminate the lease early.

The size of the surrender payment depends on the market, the landlord's ability to re-let the premises, the time left on the lease, and the negotiation between the parties. Surrender payments often represent a significant proportion of the remaining rent, but they are usually less than the total cost of paying out the full term.

Surrender is most likely to be achievable in a strong leasing market, where the landlord can re-let the premises quickly, or where there is a ready replacement tenant in the wings.

Option 4: Negotiated variation

In some cases, the tenant does not need to exit the lease entirely, just needs to change the terms. A variation of lease can reduce the rent temporarily, shorten the term, or remove obligations that have become unmanageable, by agreement with the landlord.

Landlords will often agree to a variation rather than risk losing the tenant altogether. This is particularly true where the business is viable but facing short term pressure, and the landlord's alternative is an empty premises and a difficult re-letting process.

If you are trying to negotiate an exit or variation, book a call with us:

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What happens if the landlord says no

If the landlord refuses to consent to assignment, subletting, or surrender, the tenant's options narrow. Whether the landlord's refusal is lawful depends on the lease and, if applicable, the retail leasing legislation in your state.

Where the landlord is required to act reasonably and is withholding consent unreasonably, the tenant may have grounds to challenge the refusal, including through a state tribunal for retail leases. This is a legal process that takes time and cost to pursue, but it can force the landlord to agree to an assignment or subletting that they are trying to block commercially.

The importance of your lease wording

The practical reality of exiting a commercial lease is that your options are only as flexible as your lease allows. A lease with clear assignment rights, broad permitted use, and no restrictive consent provisions gives the tenant far more flexibility than a lease drafted entirely in the landlord's favour.

This is one of the most important reasons to get a lease reviewed before signing. The clauses that determine your ability to exit are locked in at the start, and almost impossible to change later.

One missing clause in any contract can cost you thousands. Click here to learn about other important clauses.

The bottom line

You can exit a commercial lease early in Australia, but not by walking away. The lawful routes are usually assignment to a buyer, subletting to a third party, surrender by agreement with the landlord, or a negotiated variation. Each requires the landlord's cooperation to some extent, and each requires you to work within the terms of your existing lease.

The single worst thing you can do is stop paying rent, vacate the premises, and hope the problem goes away. It will not. The lease will continue, the landlord will likely sue, and any personal guarantee will be called on.

Get advice before you exit your lease

If you are trying to get out of a commercial lease, or you are considering it, book a call with us to review your exit options: