If you need to make the difficult decision to close your business, you may be wondering if you’re still obliged to pay rent until the end of your lease term.
First things first, before you decide to close, make sure you’ve reviewed all recent changes announced by the government to ease the burden on businesses and prevent them from closing. This includes a six-month moratorium on evictions for commercial (and residential) tenants who can’t afford the rent and various stimulus packages to inject money into Australian businesses. You may find this is enough to prevent you from closing.
However, if ultimately you find that you will still need to close permanently, it’s important to understand your rental obligations. The bad news is that a commercial lease will remain valid, even if your business operations draw to a close. The good news is there are options available to you to terminate a lease early. It’s important to have your lawyer review the conditions in your lease agreement before taking any further action.
Here are some of the options which may be available to you.
Pay an early termination penalty
Some commercial leases will include a clause which allows for early termination of the lease upon payment of a penalty. While this can be costly, in many cases it may be more cost effective than paying out the lease term.
Negotiate with your landlord to surrender the lease
If your lease doesn’t contain an early termination clause, the best thing to do is to speak with your landlord. You can negotiate to surrender your lease, which is when both parties mutually agree to end the lease. This will usually involve paying a fee and covering the landlord’s legal costs.
Apply a force majeure clause
Generally commercial leases won’t contain force majeure clauses, but if yours does, you may be protected if your business has closed as a direct result of the coronavirus pandemic. Force majeure clauses alter lease obligations or enable parties to end the lease should they be affected by a major and unavoidable event such as a war or pandemic. Have your lawyer review your lease to see whether this is included.
Consider the doctrine of frustration
The doctrine of frustration applies when a tenant is prevented from occupying their premises, automatically terminating the lease. However, the doctrine is rarely successfully applied (even in cases of fire or demolition) and it is unlikely a tenant would be successful applying the doctrine in the case of coronavirus. It’s best to discuss your specific case with your lawyer to make an assessment.
Sublet the space
If terminating the lease is prohibitively expensive, you may want to consider subletting the premises to another tenant for the remainder of your lease term. You will need to seek permission from the landlord and you will remain responsible for all lease obligations, despite someone else renting the space. The challenge with this option in the current context is that it may prove difficult to locate a tenant.
Pay out the remaining rent until the end of the lease term
If your lease does not provide for early termination and you have been unsuccessful in negotiations with your landlord you may find that you have no choice but to pay out the rent for the lease term.
Keep in mind that more options for businesses which need to close down may become available over time through government intervention. Make sure you are keeping a close eye on any government announcements and are in touch with your lawyer for advice.
Rolf Howard is Managing Partner of Owen Hodge Lawyers. He has been in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. Rolf focuses on assisting clients to proactively manage legal responsibilities and opportunities to achieve competitive advantage. Rolf concentrates on business planning and formation, directors’ duties, corporate governance, fund raising and business succession. His major interest is to assist business owners and their financial advisers plan and implement strategies to build and exit from successful businesses.