The good, the bad and the ugly when you want to break your lease early

By Andrew Grima, Principal, Coleman Greig Lawyers

We live in times that are both exciting and difficult as retailers, depending on where you are located. We are experiencing the lowest interest rates on record, but market volatility, development or lack thereof, consumer confidence and other factors all have the power to impact a pharmacy’s business.

If your business is being adversely impacted because of external factors related to your location, or you’ve spotted a better opportunity, can you break your lease early?

The bad news

Basically, once you’ve signed a lease you’ve committed to the terms for its duration. If you decide that you want out earlier than what you and your landlord have agreed, then you’re potentially liable for the full term of the lease. In other words, it’s like buying a property – you can’t just expect to skip out on your responsibilities because you’re unable to, or don’t want to, uphold your end of the deal.

If you’re lucky, an early break provision in your lease may provide you with a ‘get out of jail free card’, but if you leave without the landlord’s consent, you can be sued for their losses. At best, you will need to cover the difference between the rent you would have been expected to pay and that of the new tenant that your former landlord has secured in your place. You will most certainly lose your bond or bank guarantee. There’s also a strong chance that you will need to repay any incentives provided by the landlord when you entered into your lease.

The good news

There may be a way out for you. We often advise clients to attempt to assign their lease over to another party or to negotiate a surrender of lease.

Assigning over your lease Read your lease terms carefully. In most instances you won’t be permitted to change the use of the premises when the lease is assigned. So, in the case of a pharmacy, whoever you assign the lease over to must have sufficient retail experience and resources.

Surrendering your lease. If you’re hoping to use this option to escape your lease early, your landlord must be willing – it’s not an automatic right conferred on a tenant. Be prepared to compensate your landlord with an appropriate surrender fee, which could include ‘make good’ costs and any potential rental loss they may experience as a result of granting the surrender. You may also need to reimburse any incentives provided.

The really ugly news

If you can’t assign or surrender the lease and your pharmacy is experiencing financial difficulties, consider negotiating rent relief with your landlord. You should also consider whether any actions by your landlord are contributing to your difficulties – for instance, if access to your pharmacy is impacted by redevelopment, you may be able to make a claim for disturbance to business. However, you need to examine the terms of your lease. If sources of potential disturbance were disclosed, then you don’t have much of a leg to stand on. You’ll need to examine this on a case-by-case basis as every lease has its own particular nuances.

Remember that if you become embroiled in a dispute, it could add to your expenses considerably. Before reaching this point, always do your due diligence:

  • Find out before you sign your lease if there are any works planned for the building or area that could adversely impact the success of your business.
  • See a lawyer. They can help you negotiate your lease so you can obtain provisions to bulletproof yourself as much as possible in case of disturbance to business, and to allow you to more easily exit stage left if you want or need to.
  • Be realistic. Appreciate that, in most instances, once you’re signed up for the term you can’t walk away.

Inquiries: Phone: +61 2 9895 9271 or Email: [email protected].