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LETS GET DOWN TO BUSINESS.

Question :
How can we get out of a commercial lease? We need to move into a space with less overhead however have 3 years left on our current lease. Our landlords have increased opex by 200% ($2700-$11k) and won’t budge on lessening our rent in the current times, which we cannot continue to afford. 

Question submitted 10/09/20 @ 11:28am
Industry: Legal
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  • Hi there, it sounds like you are in a difficult position. First, a couple of questions. Have you asked your landlord for a breakdown of the opex and checked that the charges are things that can be passed back to you under the terms of your lease? Also, have you got the “no access in an emergency” clause (this is clause 27.5 in the ADLS form of lease) which could entitle you to rent abatement for the lockdown periods, and if so, did the landlord abate the rent and opex?
    Second, a couple of assumptions. I assume that the tenant under your lease is your company, and I assume that you do not have any right to terminate your lease early but you do have a right to sublease or assign with landlord consent.
    Based on these assumptions, if you cannot negotiate an early termination with your landlord (this may be palatable to the landlord if you offer a “break fee” but I appreciate that you may not be able to afford this), you could look to either assign or sublease. In brief, assignment is when you find another tenant (an assignee) to take over your lease. In this case, the assignee enters into a deed of assignment with you and the landlord agreeing to take over the lease and to comply with all the tenant’s obligations under the lease from the date of assignment. It is important to note that, unless you get the landlord to release your company, your company (and any guarantors under the lease) will remain liable for any default by the new tenant/assignee for the remainder of the lease term. That means if the assignee stops paying rent, for example, the landlord can claim this from you.
    A sublease means you find another tenant to take over some (or all, if the lease allows) of the area that you lease. They will enter into a sublease of that area with your company and will pay rent to your company under that lease. Your company will remain as a party to the lease with the landlord – so your company will still be liable directly to the landlord under the lease.
    In both cases it is usual for the lease to require you to get landlord consent first, and the lease usually sets out the conditions of that consent, but the landlord must be reasonable in giving that consent.
    Otherwise, you will continue to be liable as tenant under the lease for the remainder of the term. Your exposure in this respect will depend on a number of factors. I would be happy to look at the terms of your lease and have a chat – if you email me (amanda.spratt@minterellison.co.nz) your contact details I can give you a call.

    Hi Amanda,
    Thank you so much for your answers and insight. You are correct in all your assumptions! Unfortunately the landlord wrote the tenancy favouring their loose explanation and outlining of opex. So, while it is legal what they are doing, it isn’t fair. They did give us a 10% reduction in rent for April and May however we are still feeling the affect of Covid in big ways. We have a meeting with them on Monday to see if there is a solution for all and intending they are understanding for us to break the lease however your information re our liability for assigining is great info for us. I will be in touch if we need further assistance. Thank you again so much for your speedy response!
    Best regards,
    Sarah

    Hi Sarah,

    Amanda’s response is outstanding and covers all of your bases as far as your lease obligations and options go! All I can add is we are conducting a number of subleases at the moment for tenants in similar positions to yourself and there is considerable demand in the market place for these offerings where they traditionally haven’t been. Pre Covid, there has been a stigma associated with the term “sublease” and active tenants looking for space prefer to have a direct relationship with the landlord. Since Covid, businesses are more inclined to work together, or even share space to help lighten each other’s loads.

    Be wary there is still an expectation that a sublease offers cheaper renting options, whereby the head tenant (i.e. you) would top up any shortfall in rent or outgoings. This can work as a point of difference from other lease vacancies, but a word of caution none the less.
    Most pragmatic Landlords realise now more than ever the importance of looking after and working with their tenants particularly given property holding costs associated with mortgages have dropped. It would be worth highlighting your willingness to work with the Landlord and perhaps come up with a new lease payment plan where the rent payments due over say the next 12 months can be discounted and then added onto monthly payments in years 2 or 3 of your remaining 3 year term, if your cashflow forecasts can manage this.

    Good luck with the meeting on Monday!

    Cheers,

    Blair

    Thanks Blair – agree with your comments. That’s good intel on what you are seeing in the market. As you say, landlords need to be pragmatic and Sarah hopefully you will find that to be the case on Monday – let us know how it goes. Cheers, Amanda

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