(Part 3 of a series by Andrew Grima)
In the previous two articles of this series on commercial leasing, I highlighted the importance of laying the foundations of a leasing transaction and the issues you need to consider when negotiating and documenting a leasing transaction.
My last article in this series will focus on how the leasing deal can come to an end, the consequences associated with ending a lease and what you need to consider in such circumstances.
Ending a lease
A lease can come to an end in the following circumstances:
- The term of the lease has expired;
- The lease is terminated following a default (of usually the tenant);
- The lease is terminated as a result of the landlord exercising its rights following a redevelopment or demolition of the premises or the building that the premises is located in;
- The tenant negotiates a surrender with the landlord.
The important issues
The main issues that arise when a lease comes to an end, regardless of the circumstances surrounding its termination, include
- Does the tenant owe the landlord any money under the lease, and if so what arrangements will be made to ensure its recovery?
- What is the extent of the tenant's make good obligations? Do the premises need to be stripped to a bare shell, or does it need to be returned to what it was like when the tenant first took occupation – is there a condition report that can be referred to?
- Who is responsible for remediating any environmental damage?
- Is there any structural damage to the premises and if so, who caused it and who is responsible for repairing the damage?
- When must the landlord return the bank guarantee or security deposit to the tenant? Can a failure on the part of the tenant to comply with any of its obligations referred to points 1 to 4 enable the landlord to withhold part, or all, of that bank guarantee or security deposit?
These questions can be answered by a review of the obligations under the lease, the terms of any supporting documents (such as the bank guarantee) and a comparison of the facts of the case against the terms of these documents.
Is compensation payable?
When a lease is terminated following a default by the tenant, or following any redevelopment or demolition, the parties may also need to consider what compensation may be payable. More specifically:
- If the tenant is in default, are damages calculated on the loss of rent plus interest owing for the term of the lease whilst the premises has not been relet? Exactly what type of default must the tenant be guilty of before a lease can be validly terminated by a landlord?
- If the landlord is refurbishing or demolishing, what must the landlord pay to the tenant eg. depreciated value of the fit out, shifting expenses, fit out of new premises?
- If the parties have negotiated a surrender, what is the basis for calculating the surrender fee?
These questions can be answered by a review of the terms of the lease and the relevant legislation – such as retail tenancy legislation.
Think about these issues before you act!
Over the years I have seen clients caught up in time-wasting and messy legal disputes simply because they have not addressed these questions thoroughly before terminating a lease.
As the head of Coleman Greig's property team I would be happy to walk you through the issues surrounding your particular lease, and address the issues of termination and what your benefits and responsibilities might be in advance. Obtaining qualified legal advice before ending a lease could save you considerable time and money!
For more information contact Andrew Grima at agrima@colemangreig.com.au
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
