Commercial lease is a lengthy document which outlines rights and obligations of both the tenant and the landlord. Given the complex nature of it, it often turns into a minefield for the party who lacks the legal representation in signing, executing and enforcing the lease. In the case where one party seeks an early termination, both parties have to walk a tight rope to avoid the potential lawsuit as a result of the failed negotiation. Here are the five things you need to be aware of before seeking an early termination of the lease from the tenant’s perspective.
1. You Cannot Walk Away Without Consent
Commercial lease usually specifies the term of the lease. If one party seeks an early termination, the other party is not obligated to agree to it. Some leases contain a clause specifically deal with the early termination situation. Some do not. Under this circumstance, if the party walks away the lease without the consent of the other, the other party can sue the other for breaching the lease and claim the resulting damages. Where the tenant unilaterally terminates the lease, the landlord can sue the tenant for the rent for the remaining term of the lease. Where the landlord unilaterally ends the lease, the tenant has a claim against the landlord for all the losses incurred as a result of the early termination.
2. You May Have To Pay For Restoration
Commercial lease generally contains a clause requiring the tenant to restore the premise to the original condition at the expiry or the termination of the lease, at the tenant’s cost. If the tenant does not fulfill the obligation, the landlord can step in to conduct the restoration and charge back the tenant. This can be a very risky area. Some tenants think it is less hassle by paying the landlord to do the work but don’t realize that by doing so, they are putting themselves in a precarious spot. The tenant may find themselves in a situation where they cannot control the speed and the cost of the restoration. Thus, it is always recommended that the tenant consults a lawyer before entering into an early termination negotiation with the landlord themselves.
3. You’d Be Better Off Having A Termination Agreement
In the case where there is no specific clause governing early termination, to avoid any confusion, both parties would be better off entering into an early termination agreement to specify the parties’ obligation such as repair and restoration, which party bears costs, the termination date, etc.
4. You Can Terminate The Lease Early When…
In some case where the early termination is triggered by the landlord’s failure to fulfill its obligation, the tenant should exercise their option to terminate the lease with caution. Generally, the termination is only justified in a few circumstances, for example, when the lease is fundamentally breached, “that deprives the innocent party of substantially the whole benefit of the contract”, or alternatively as “a breach that goes to the root of the contract”. These definitions share similar principles. If a fundamental breach is found, the party to whom the fundamental breach was committed against is entitled to treat the contract as at its end. However, the threshold to find a fundamental breach is quite high, often, the tenant who treats the lease as an end finds themselves considered as the party who breached the lease by the court.
The tenant is also justified to terminate the lease if the lease is “frustrated”. This has nothing to do with tenant’s feelings. The doctrine of frustration describes a situation where unforeseen circumstances make the contract and its objectives virtually impossible to execute; make the performance of the contractual obligations illegal; render the contract fundamentally different from its original intended character. In this case, the lease is terminated without liability to either party.
There are also other circumstances where the lease can be terminated such as fraud, misrepresentation. Each case requires a contextual and thorough analysis. Contact us today to get in touch with our experienced Leasing Lawyers who can assist with your commercial leasing.
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