There are a number of things a tenant needs to do when a commercial lease comes to an end, or the tenant wishes to terminate the lease agreement early.
It’s important that these obligations are observed as otherwise a landlord may be entitled to recover damages from the tenant.
Below are five key things a tenant should be aware of and prepare for at the end of a commercial lease.
If anything in this article applies to your situation, you should seek out the guidance of our experienced commercial property Lawyers at South Geldard Lawyers to ensure you’re not left out-of-pocket.
1. Make good obligations and other issues
Most commercial property leases include ‘make good’ obligations in relation to the premises at the end of the lease.
These obligations can vary but generally include:
- Leaving the premises in good repair,
- reinstating the premises to the condition they were in at the start of the lease,
- reinstating the premises to a specified condition.
Examples of what might be required of a tenant at the end of a fixed-term lease include cleaning the premises, repairing any damage, repainting, removing fixtures or fittings or replacing carpets.
A regular sticking point at the end of commercial leases are disagreements about the terms of making good clauses. It’s important that both parties are clear about what is required.
A tenant, in particular, should work out any changes or specific requirements before they sign the lease.
A landlord needs to make the obligations of the tenant clear so as to be legally enforceable.
A tenant who fails to fulfil their obligations under a lease may be liable to the landlord who may be able to take the cost of completing the necessary work from the bond or bank guarantee.
2. Repair versus reinstatement of a premises
The law has previously distinguished between a tenant’s obligation to carry out repair works at the end of the lease, and an obligation to reinstate premises to a specified condition.
If a tenant fails to reinstate a premise under a lease provision, the landlord may be entitled to recover as damages any reduction in the value of the premises which results from the non-performance of the work. Where there is evidence a landlord planned to demolish or redevelop premises, this may be used by the tenant to show the landlord suffered no reduction in the value of the property.
A tenant who meets its make good obligation should expect to have their bond or bank guarantee returned at the end of the lease unless there are other penalties within the lease for ending a lease early or failing to meet other terms and conditions.
3. Early termination of a commercial lease
A tenant may be able to negotiate a mutual agreement with a landlord if they need to end the lease before the fixed period.
Early communication between the parties about make good obligations and other financial obligations are highly advisable to avoid later disputes or misunderstandings about what is required to end the lease.
It should be noted a landlord is not obliged to release a tenant from the lease agreement.
If the landlord agrees to end the lease, the agreement should be documented in a deed of surrender. Some landlords may ask the tenant to pay a surrender fee in order to break the lease, and tenants may also need to pay the legal costs of the landlord to do so.
The deed ends a tenant’s legal obligations in regard to the premises.
A tenant may be able to transfer their rights and obligations to a new tenant through an assignment of the lease.
A landlord must consent to the assignment of a lease, with both the consent and the assignment documented under deeds.
The tenant will usually have to pay the landlord’s legal costs to complete the assignment.
It’s important that a tenant is aware their obligations don’t completely end under an assignment of a lease because the original lease agreement continues.
Finally, some commercial leases include an early termination or ‘break’ clause, allowing for an early exit from the lease. These clauses should be negotiated between tenant and landlord before the lease agreement is signed.
4. How the advice of experienced commercial property lawyers can help
As we’ve mentioned, disputes over a tenant’s obligations at the end of a lease are common and are usually the result of ‘grey’ areas in the lease agreement about make good provisions and costs associated with exiting the premises.
At South Geldard Lawyers, we represent both landlords and tenants in disputes about the end of leases, as well as all other commercial property issues. We regularly advise our clients on make good obligations or what’s involved with transferring or assigning a lease.
All commercial leases are different depending on the type of business that will be run from the premises. A lease of the rural property has many different features to a commercial lease in a CBD.
If you need further detail on anything raised in this article – call South Geldard Lawyers today for an initial consultation
It is important to seek specific advice regarding your circumstances as this fact sheet provides general information only and does not constitute legal advice.
