Help… I want to get out of my commercial lease!

The recent sequence of earthquakes in Wellington has seen a number of tenants trying to get out of their commercial leases. In some cases, this may be because the tenant has genuine concerns about the building and in others it may simply be motivated by fear of ‘the big one’ and what might happen.

Commercial tenancies generally have a fixed term, which means that you will need to reach an agreement with the landlord to end the lease before the term expires. If you simply walk out, the landlord should try and re-let the premises as soon as possible but may find this difficult to do if there is a possibility that the building has been damaged. As a result, you could end up being liable for the rent until the term of your lease expires. Even if the landlord can re-let the premises, if the market rent is lower you could find yourself having to pay the difference for the balance of your lease term.

Even if you are able to assign your lease, you could still be liable for the new tenant’s obligations if that tenant defaults. You could also end up liable for any shortfall in rent. You should therefore give careful consideration to choosing any such new tenant.

Generally, you cannot cancel a lease because there has been an earthquake or other natural disaster. The standard that needs to be reached before cancellation rights can be exercised is that the premises are “untenantable”. This is a very high standard to reach.  Because of this, the most common scenario for tenants is entering into negotiations with the landlord to terminate the lease early.

You may be able to negotiate a fixed sum payment with the landlord to ‘buy out’ the remainder of your term. In negotiating this sum, you should carefully weigh up the costs you may be liable for under the remaining term of your lease.

In any event, before you decide to leave you should also carefully check your lease to see what your obligations are to reinstate the premises. Most standard leases will require that you reinstate the premises to the condition it was in when you first took on the lease, which could be a substantial cost if you made significant modifications to the premises.

What else can I do?

There are some things you can do to protect yourself without needing to quit the premises:

• Check if your lease has a “no access period” clause. After the Christchurch earthquake, “no access periods” were inserted into the standard form lease. This records that if a tenant is unable to gain access to the premises for a certain period, other than in circumstances where the premises or business are totally or partially destroyed or damaged, either party can terminate the lease. Therefore, if your premises were in a ‘cordoned off’ zone but undamaged, you could still cancel the lease after a certain period. If your lease is an old form of lease without this clause, you may want to think about negotiating such a clause with the landlord.

• Make sure you and your landlord have appropriate insurance cover. You should check your lease to see what insurance cover you and your landlord are obliged to provide and make sure there are no ‘gaps’. This should include business continuity cover in the event that you are unable to continue to operate at the premises for a period.

If you do have genuine concerns about the safety of the building, make sure you raise them with the landlord. Under the standard lease, the landlord has obligations to use his or her insurance money ‘with all reasonable speed’ to make the necessary repairs to a damaged building. If the insurance money is insufficient, or the premises cannot be repaired, you may be able to terminate the lease.

Your lease may be one of your most important business agreements, and it’s important to get professional advice if you have any concerns. If you want to discuss your commercial lease, give Claire Tyler a call on (04) 473 6850.