Can a Business Get Out of a Commercial Lease Early in Ontario?
A business can change considerably during the life of a commercial lease.
The company may outgrow the premises. Revenue may decline. Operations may move online. A new location may become more attractive. The business may be sold, reorganized or closed altogether.
Whatever the reason, one difficult question can follow:
Can the business simply end the commercial lease early?
Usually, the answer depends heavily on the lease itself and the circumstances surrounding the tenancy.
A fixed-term commercial lease is a contract. If the agreement does not contain a right allowing the tenant to terminate early, deciding to leave the premises does not necessarily end the tenant's contractual obligations.
That does not mean a business has no options.
Depending on the lease and the circumstances, there may be several potential paths to consider.
1. Start With the Termination Provisions in the Lease
The first step is to review the agreement itself.
Some commercial leases contain specific rights allowing the tenant to terminate before the end of the term.
These rights may arise:
after a particular date;
upon payment of a termination fee;
if certain conditions occur;
if the premises become unusable;
following specified landlord defaults;
in connection with redevelopment or relocation provisions; or
under another negotiated break clause.
The wording matters.
A termination right may require advance written notice, payment of specific amounts or compliance with detailed procedural requirements.
A business should not assume that because a termination right exists, it can be exercised at any time or for any reason.
The lease needs to be reviewed carefully before any termination notice is sent.
2. A Fixed-Term Lease Usually Creates an Ongoing Commitment
A commercial tenant may believe that vacating the premises ends the relationship.
Contractually, that may not be the case.
If a business has signed a five-year lease and wants to leave after three years, there may still be two years remaining under the agreement.
Unless the lease provides an exit right or another solution is reached, the landlord may assert that the tenant remains responsible for obligations under the lease.
Those obligations can potentially include more than base rent.
Depending on the wording of the agreement, the tenant may also have responsibilities relating to:
additional rent;
operating costs;
taxes;
utilities;
repairs;
restoration;
insurance; and
other amounts payable under the lease.
This is why businesses should assess the potential financial exposure before simply vacating the premises.
3. Assignment May Provide a Way to Transfer the Lease
One possible option is to assign the lease to another business.
An assignment generally involves transferring the tenant's interest under the lease to another party.
This can be useful where:
the business is being sold;
another business wants the premises;
the tenant is relocating;
the company is restructuring; or
the remaining lease term still has commercial value.
But assignment rights are usually governed by the lease.
The agreement may require landlord consent and may impose conditions on the proposed assignee.
A business should review:
whether assignment is permitted;
whether landlord consent is required;
what information the landlord may request;
whether the landlord has additional rights when assignment is proposed;
whether the original tenant remains liable after the assignment; and
whether a transfer of ownership of the business itself is treated as an assignment.
An assignment can transfer the lease, but it does not necessarily release the original tenant from liability.
That distinction should be understood before relying on assignment as an exit strategy.
4. Subletting May Help Offset the Cost
Subletting is different from assignment.
With a sublease, the original tenant generally remains the tenant under the main lease while allowing another party to occupy all or part of the premises for a period of time.
This may help where the business:
has more space than it needs;
wants to move before the lease expires;
needs temporary cost relief; or
is not ready or able to permanently assign the lease.
Again, the lease should be reviewed carefully.
The landlord's consent may be required, and the original tenant may continue to be responsible for the lease even if the subtenant fails to pay.
Subletting can reduce the financial burden of unused premises, but it may not provide a complete release from the tenant's obligations.
5. The Landlord and Tenant May Negotiate an Early Surrender
Sometimes the most practical solution is a negotiated termination.
The landlord and tenant may agree to end the lease early through a surrender or termination agreement.
The terms can vary significantly.
For example, the tenant may agree to:
pay a termination amount;
continue paying rent for a defined period;
contribute toward leasing costs;
restore the premises;
leave certain improvements behind;
assist with showing the premises; or
vacate on an agreed date.
In exchange, the landlord may agree to release the tenant from future obligations.
Whether a landlord is willing to negotiate can depend on market conditions, the premises, the remaining lease term, the tenant's payment history and the likelihood of finding another occupant.
A negotiated exit can create certainty, but the release language needs to be clear.
A tenant should understand exactly which obligations are ending and whether any liabilities survive.
6. A Replacement Tenant Can Change the Negotiation
A tenant approaching the landlord with a problem may have limited leverage.
A tenant approaching the landlord with a qualified replacement may be in a different position.
If another business is prepared to take over the premises, the landlord may be more willing to discuss:
an assignment;
a new lease with the replacement tenant;
an agreed surrender of the existing lease; or
another transition arrangement.
This does not guarantee that the landlord will agree.
But from a commercial perspective, reducing the landlord's risk of vacancy can materially change the conversation.
Businesses considering an early exit may therefore want to think not only about the legal position, but also about the commercial solution they can present.
7. A Sale of the Business Does Not Automatically End the Lease
Business owners sometimes assume that selling the company will transfer the lease automatically.
That may not be the case.
The lease may contain provisions dealing with:
assignment;
transfers;
changes of control;
mergers;
reorganizations; and
sales of substantially all business assets.
If the purchaser needs the premises, the lease can become an important part of the transaction.
Landlord consent may need to be obtained before closing.
The seller should also determine whether it will remain liable under the lease or any personal guarantee after the transaction.
Commercial lease issues should be considered early in a business sale, not at the end of the deal.
8. Personal Guarantees Can Survive the Business's Exit
If the lease is guaranteed personally by a shareholder, director or owner, the business leaving the premises may not eliminate the guarantor's exposure.
The guarantee should be reviewed separately.
Important questions include:
what obligations are guaranteed;
whether the guarantee covers the entire lease term;
whether it continues after an assignment;
whether it applies to renewal periods;
whether liability is capped; and
when the guarantee is actually released.
If the company has ceased operations but the guarantee remains enforceable, the landlord may look to the guarantor for outstanding obligations.
This is one reason personal guarantees deserve particular attention when planning an early exit.
9. Landlord Default May Affect the Analysis
In some circumstances, the business may want to leave because of problems with the premises or the landlord's performance.
For example, disputes can arise around:
significant repairs;
access;
building systems;
water infiltration;
maintenance;
interference with use of the premises; or
other landlord obligations.
The fact that a landlord has failed to perform an obligation does not necessarily mean the tenant can simply terminate the lease.
The agreement should be reviewed to determine:
what obligations the landlord has;
what remedies the tenant receives;
whether notice is required;
whether the landlord has a cure period; and
whether termination is available in the particular circumstances.
Businesses should be cautious about treating a landlord dispute as an automatic right to stop paying rent or leave the premises.
The legal consequences can be significant.
10. Financial Difficulty Does Not Automatically Cancel the Lease
A business may need to leave because its financial circumstances have changed.
Unfortunately, financial hardship by itself does not generally rewrite the commercial agreement.
That makes early engagement important.
Waiting until substantial arrears have accumulated can make a negotiated solution more difficult.
Where the business recognizes that the premises are no longer sustainable, it may be useful to assess options early, including:
negotiation with the landlord;
assignment;
subletting;
restructuring the space;
identifying replacement tenants; or
another commercial arrangement.
The sooner the issue is addressed, the more potential solutions may remain available.
What Happens If the Tenant Simply Walks Away?
Simply returning the keys is not necessarily the same as legally terminating the lease.
The landlord may take a particular position in response to the tenant's departure, and the consequences can depend on the agreement and the facts.
Potential exposure may include claims relating to unpaid rent, additional rent, damages, repair or restoration obligations and other contractual amounts.
The existence and amount of any claim will depend on the circumstances.
That is why a business considering an early exit should understand its legal position before abandoning the premises or communicating that it no longer intends to perform the lease.
Can the Landlord Be Required to Find Another Tenant?
Issues relating to mitigation can become important when a commercial lease ends prematurely.
But businesses should avoid assuming that this automatically eliminates their liability.
How mitigation principles apply can depend on the circumstances, the landlord's response to the termination, and the contractual and legal characterization of what occurred.
This is an area where specific legal advice is particularly important.
The possibility that the premises may ultimately be re-leased should not be treated as a substitute for understanding the tenant's obligations under the existing lease.
Which Exit Option Is Best?
There is no single answer.
The most appropriate strategy depends on factors such as:
how much time remains on the lease;
the amount of rent and additional rent;
whether there is a termination clause;
assignment and subletting rights;
the strength of the local leasing market;
whether another tenant can be found;
whether a personal guarantee exists;
the landlord's position;
the condition of the premises; and
why the business needs to leave.
In some cases, the lease itself provides a relatively clear route.
In others, the best outcome may come from a commercial negotiation rather than a unilateral contractual right.
Review Your Options Before Taking Action
Wanting to leave a commercial space and having the contractual right to terminate the lease are two different things.
Before stopping rent payments, vacating the premises or sending a termination notice, a business should understand:
what the lease requires;
whether an early termination right exists;
what assignment or subletting options are available;
whether a negotiated surrender may be possible;
whether guarantees remain in place; and
what financial exposure may remain after departure.
The objective is not simply to leave the premises. It is to understand how to exit the commercial relationship with as much clarity and control as possible.
Learn More About Commercial Leases and Contract Law
For more articles on commercial lease reviews, renewals, operating costs and other issues affecting business tenants, visit Delta Law's Resources.
You can also learn more about how Delta Law reviews and negotiates commercial agreements through our Contract Law Services.
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Delta Law assists businesses with commercial lease issues, including termination provisions, assignment and subletting, lease renewals, landlord negotiations and other contractual matters affecting commercial tenancies.
