Business circumstances change. A once-profitable shop may become unsustainable due to rent hikes, reduced foot traffic, or a global downturn.

Breaking a commercial lease early (also called 'repudiation' or 'abandonment') carries serious legal and financial consequences under Australian contract law and state retail tenancy legislation.

This article outlines exactly what you risk and how to minimise liability.

Your Liability Under the Lease

Most commercial leases are for a fixed term (e.g., 3, 5, or 7 years).

If you break the lease before the expiry date without a legal right to terminate, the landlord can sue you for:

  • Rent for the remainder of the term (or until the landlord finds a new tenant – known as 'mitigation of loss').
  • Outgoings (council rates, water, strata levies, land tax).
  • Re-letting costs (advertising, agent commissions, legal fees).
  • Make good costs (restoring the premises to original condition).
  • Loss of lease incentive (if the landlord gave you a rent-free period or fit-out contribution).
Example: You have 4 years left at $10,000/month rent. Landlord finds a new tenant after 6 months at $9,000/month. You owe: (4 years – 6 months) × $10,000 = $420,000, minus $9,000 × 42 months = $378,000? Not exactly – you owe the shortfall plus re-letting costs. Total can exceed $100,000.

Landlord's Duty to Mitigate Loss

Under Australian common law (following the principle from Burns v MAN Automotive (Aus) Pty Ltd), the landlord must take reasonable steps to find a new tenant.

However, 'reasonable' is interpreted leniently:

  • Landlord can wait 3–6 months to re-list.
  • Landlord is not required to reduce the asking rent below market.
  • If the property is specialised (e.g., a restaurant with expensive fit-out), mitigation may be impossible.

You bear the burden of proving the landlord failed to mitigate – which is difficult without expert evidence.

Early Termination Clauses (Break Clauses)

Some leases include a 'break clause' allowing you to terminate early, usually at a specific date (e.g., end of year 3 of a 5-year lease).

Conditions are strict:

  • Notice period: Often 6–12 months in writing.
  • Payment penalty: 2–6 months' rent as a break fee.
  • No outstanding breaches: Rent must be paid up to date, and no uncured defaults.
  • Make good completed: You must restore the premises before vacating.
If you miss the notice deadline by even one day, you lose the break clause right. Put it in your calendar with multiple reminders.

Assigning the Lease (Finding a New Tenant)

A better option than breaking the lease is to assign (transfer) it to a new tenant.

Under most state Retail Leases Acts, the landlord cannot unreasonably withhold consent to an assignment.

However, 'reasonable' includes:

  • New tenant's financial viability (bank references, trading history).
  • New tenant's business suitability (no direct competitor if exclusivity clause exists).
  • New tenant must sign a deed of covenant to assume all obligations.

You remain liable under a 'guarantee' unless the landlord releases you (which they rarely do without a premium).

Statutory Protections for Small Businesses

The Competition and Consumer Act 2010 (Cth) – specifically the Unfair Contract Terms provisions (as amended by the Treasury Laws Amendment Act 2022) – may void certain penalty clauses if they are disproportionate.

For example, a clause demanding 12 months' rent as a break fee on a 3-year lease may be an unfair penalty.

However, this is untested territory; you would need a court ruling.

Practical Steps If You Must Break the Lease

  • Negotiate a surrender deed: Offer a lump sum payment (e.g., 6 months' rent) in exchange for full release. Get it in writing.
  • Sublease with landlord's consent: Find a subtenant to pay your rent. You remain primarily liable.
  • Seek mediation: Through the Small Business Commissioner (free or low cost).
  • Consider liquidation (last resort): If your company is insolvent, the lease ends upon liquidation, but directors may face personal liability if they signed a personal guarantee.

Breaking a lease is expensive but not always ruinous. Get legal advice before communicating with the landlord – anything you say can be used as an admission.