What Happens If I Default On My Lease?
Through the coronavirus pandemic and market downturn, many landlords and tenants have come to arrangements to help each other get through.
These arrangements were guided by the Commonwealth Government’s Mandatory Code of Conduct which detailed commercial leasing principles to help landlords and tenants through the crisis.
While landlords were required to provide rent relief measures for eligible tenants, it has never been a ‘rent free’ arrangement. And for some who have experienced great financial struggles, these provisions may still not be enough and you may not have the capacity to pay the deferred rent post COVID-19.
Remember as a tenant, there is nothing stopping you from approaching your landlord with your situation and mediating your lease, either informally or formally with the help of a property advisory and/or lawyer. Most landlords would actually prefer to come to a new rental agreement than deal with a defaulting tenant and a vacant property.
However, should the worst happen and you default on your agreement as a tenant, here’s what could happen.
What will happen if you default on your lease?
When you default on any obligations under your commercial lease, such as a failure to pay rent, your landlord will be forced to follow a number of procedures.
You’ll firstly be issued a formal notice and you’ll generally have 14 days to remedy your breach.
If you fail to remedy, then your landlord will seek recovery of the rent payable under your lease, including the unpaid rent and remaining future rent, on top of any legal costs and costs incurred for cleaning the premises. Most landlords will generally call on your security deposit to make up for these losses.
If specified in the formal notice and you have outstanding rent, your landlord will also have the right to re-enter the premises, take possession of any goods you have and sell them by public auction to recover these costs.
In extreme cases, you could find yourself in court if your landlord decides to sue you for all current and future losses.
What are your options?
Defaulting is never pretty, so to avoid the pain there are two options for you to end your lease prematurely … and on much better terms.
Assign your commercial lease
If your business has goodwill attached, you can sell your business to a potential buyer and assign them your commercial lease. Your new, incoming tenant will then take on the obligations of your lease and you’ll be discharged from the lease after the assignment date.
In majority of retail leases, your landlord is unable to withhold consent of your incoming tenant if they possess relevant business skills and are financially secure. However, you need to check whether your lease includes a right of first refusal provision, in which you must give your landlord first preference to buy your business before you offer it to someone else.
Alternatively, if you don’t wish to let go of your business, you can consider subletting the premises and sharing the lease costs with a subtenant.
Surrender your lease
If assigning your lease isn’t an option, or you’re looking for a quicker exit from your lease, you could consider surrendering it instead. Negotiating a surrender of your lease with your landlord will depend on a number of factors, including their ability to find another tenant, and fast.
If you’re fortunate enough and your landlord agrees to take back the premises, it’s standard procedure to be issued an exit fee. The surrendering process also involves you entering into and executing a deed of surrender prepared by your landlord’s lawyers.
Don’t leave your lease troubles to the last minute.Both landlords and tenants should get advice about their agreements and options from a property expert as soon as possible.
Contact us to discuss your needs. No obligations.
Managing Director, Broadway Property
Director, Broadway Property