How can I get out of my business lease early?!

By On Your Terms co-founder Natalie Fennell
Sept 2023

Can’t afford your rent? Need to downsize? Want to move premises? Closing your business? In this blog we explore your options to get out of your business lease early or reduce your rent so that you don’t spend thousands on a leased premises you don’t need.

Most commercial leases in New Zealand are for a fixed term, often several years, without any ability for the tenant (that’s you) to end the lease early (known as ‘terminate’ or ‘cancel’). The lease ends when the fixed term ends. So what can you do if you need to get out before the end of the fixed term?

Option 1 – Terminate early

Your lease may contain a specific clause allowing you to terminate it before the end of the fixed term. Most leases will not but it’s worthwhile checking. Look for a clause headed ‘early termination’ or ‘cancellation rights’. If you can terminate early, there might be specific notice requirements (such as number of days of notice or how the notice is delivered), so make sure you comply with these to avoid a dispute or financial penalty.  There may also be a fee payable.

Option 2 – Transfer your lease to a new tenant as part of your business sale

If you have valuable business assets (stock, equipment, IP), consider a sale of business which would include transferring (known as ‘assigning’) your lease to the new owner. The new owner will take over all your obligations under the lease (eg, to pay rent). However, you (and any guarantor that has provided a guarantee under your lease) remain responsible to the landlord for any failure by the new owner to comply with the lease eg, to pay rent. This means the landlord can come after you (and any guarantor) if the new owner fails to pay rent.

Most leases will state that an assignment requires your landlord’s prior consent. Your landlord may not have to provide this consent if certain conditions aren’t met, such as if the new tenant is not financially stable. Check your lease for any conditions and the process for obtaining landlord consent so you know what your rights are. An assignment will need to be documented in a Deed of Assignment of Lease, and usually, it’s the exiting tenant’s responsibility to pay for the legal costs of this deed.

Option 3 - Sublease or licence all or part of your space

If you want to vacate your leased premises temporarily (perhaps you see business conditions improving in the future), or keep only part of your leased premises and vacate the other part permanently (to reduce your rent), consider subleasing or licencing.

With a sublease, you lease all or part of your premises to a new tenant (known as the ‘sub tenant’), for the rest of the current lease term. You remain responsible for paying all rent, outgoings etc. to the landlord under your lease, and the sub-tenant pays you its rent, outgoings etc. If the sub-tenant doesn’t pay you, you still must pay the landlord. The sub-tenant has exclusive possession of the leased area.

With a licence, the tenant is only given the right to use the area, part of which may be shared with you or another tenant. Licences are typically for a shorter term than a lease and can often be cancelled on one month’s notice). 

Again, landlord consent will most likely be required, and there may be conditions to meet to get that consent. Check your lease for any conditions and the process. You may be able to find a suitable sub-tenant or licensee yourself, otherwise, talk with a commercial real estate agent. To ensure all the key terms are clearly recorded, a sublease should be documented in a Deed of Sublease, and a licence should be documented in a Property Licence.

Option 4 - Surrender your lease

If assignment or subleasing are not viable options for you, and your lease doesn’t give you a right to terminate early, to leave your premises before the end of the term you will need to negotiate an early exit from your lease with your landlord. This is known as a ‘surrender’ of lease, and depending on your bargaining position you will need to be prepared to pay an exit fee.  

The amount of the exit fee will be negotiable, it might be the full amount of rent until the landlord can find a replacement tenant, or a percentage of that, or could just be the landlord’s costs of finding a new tenant (eg, real estate agent’s fee).

Ensure you get a release of any personal guarantee or other security given to the landlord. You will need to leave the premises in the condition required under your lease - often this is the same condition it was in at the start of the lease (except for fair wear and tear).

Negotiate with your landlord

Once you understand your options and rights under your lease, start a conversation with your landlord. Discuss your reasons for wanting to end your lease early and your preferred option. Your landlord may be willing to work with you, such as finding a replacement tenant. Keep discussions respectful and open to reach a mutually beneficial solution.

Key points

If you need to get out of your lease early, you have options. First, check what your lease says, you might be able to terminate early. If not, explore transferring your lease, subleasing or requesting a surrender from your landlord. Talk to your landlord, if someone else will take over your rent payments your landlord may be fine with the change.  Get legal advice if necessary.

To talk to a lawyer about your options or get help negotiating with your landlord, contact our law firm partner, Luminate Legal. 

Also check out our Sublease or Property Licence? The options for your business space blog. 

On Your Terms makes it faster, simpler and more affordable for New Zealand starts ups and small businesses to access top-quality legal solutions and connect with legal experts.  We’re on a mission to make legal information accessible and understandable.