How Do You Assign A Commercial Lease When Closing Your Business In Australia?

Closing a business does not end your lease obligations. Your lease remains legally binding. If you walk away without a formal exit strategy, you may face significant financial liability. This can include personal liability for directors who guaranteed the lease.

In Australia, commercial and retail leases are governed by several laws. These include contract law and state and territory retail lease legislation. The Australian Consumer Law may also apply to some lease dealings. You should understand your exit options before closing your doors. You should also understand the legal consequences of each option.

This article explains key issues when exiting a commercial or retail lease. It covers negotiated surrender, assignment and subletting.

Business Closure Lease Considerations

Your lease obligations continue even after your business closes. If you lock the doors and walk away, you may face significant financial liability. Even if your company is wound up, personal guarantors may remain liable for lease obligations.

While each lease is different, key considerations include:

1. Remaining lease term: Calculate how much rent and outgoings you will owe if you cannot exit the lease early. 
2. Break clauses: Review whether your lease contains any break clauses that allow early termination (but these are uncommon in Australian commercial leases).
3. Make-good obligations: Determine what restoration work is required when vacating and handing over the premises back to the landlord.
4. Personal guarantees: Identify whether directors or other parties have guaranteed the lease, as they remain liable even after the company closes.
5. Security deposits: Understand the conditions for recovering any bank guarantees or security bonds.

To exit a lease that is ongoing despite your business closing, a tenant may: 

1. Negotiating surrender: Agree with the landlord to terminate the lease early if there are no break clauses, usually for a fee.
2. Assignment: Transfer the lease to a new tenant (the ‘assignee’). The assignee becomes the tenant under the original lease and assumes direct liability to the landlord.
3. Subletting: Lease the premises to a subtenant while remaining the head tenant. You become a landlord to your subtenant, but the subtenant has no direct relationship with the head landlord.

For most businesses closing permanently, assignment is the preferred option. It transfers lease obligations to a new tenant and reduces your ongoing involvement.

Landlord Approval Process

Both assignment and subletting require the landlord’s consent. Under Australian retail lease laws and most commercial leases, landlords cannot unreasonably withhold consent. However, landlords can refuse consent for legitimate reasons. These may include the assignee’s inadequate financial capacity or proposed changes to the permitted use.

Each lease will specify the process for seeking consent and any conditions that must be met. Common requirements for assignments include that the assignee has similar or better financial standing than you, operates a similar or compatible business, and provides adequate security (either a bank guarantee or security deposit).

Consent is usually documented by way of a deed or side letter. The tenant and assignee usually pay the landlord’s legal costs associated with documenting and negotiating the deed of consent and relevant assignment or sublease documents.

Ongoing Liability After Assignment

Assignment does not automatically release you from all liability. You typically remain liable as a guarantor of the assignee’s performance, meaning if the assignee defaults on rent or breaches lease terms, the landlord can pursue you for payment. This liability continues for the remainder of the original lease term and may extend to renewal periods. 

Additional Retail Lease Considerations

Retail leases are governed by different laws than commercial leases. If your retail business closes, consider the following:

1. Disclosure obligations: If you are assigning a retail lease, you must provide the assignee with a disclosure statement containing key lease information at least 7 days before they sign the assignment documents. Failure to comply can result in fines and give the assignee the right to terminate the assignment, potentially derailing your exit. 

2. Minimum term protections: Retail leases legislation in most states guarantees tenants a minimum 5-year term (including option periods). If you are closing before exercising all available options, you are forfeiting valuable rights that could have been transferred to an assignee. Consider whether exercising an option before assignment makes the lease more attractive to potential assignees, though this may extend your liability period if the assignment falls through.

Professional Legal Assistance Required

When closing your business and exiting a commercial lease, legal support can help you review your lease. It can also help you identify the most cost-effective exit strategy. A lawyer can negotiate favourable terms with the landlord, including a deed of release. They can also prepare key documents, such as a deed of assignment, indemnities and security arrangements.