It pays to have an exit strategy

THERE is a long list of tenants who have successfully been sued by landlords, in the process handing over sums in the hundreds of thousands of dollars. For many, however, paying more attention when entering new lease terms could have saved them paying out the costs of litigation.

While there is a series of factors tenants need to be cognisant of if they want a good lease deal, when it comes to exiting a lease there are some factors that, unless carefully considered, can have severe financial implications.

Put simply, businesses need to plan for lease exits at the start of a lease term.

Feinauer & Associates principal Dirk Feinauer said he considered a lease on the cost of going in, the cost of being in it and the cost of exiting it.

He said businesses needed to plan and negotiate for any future exit from the premises, which could only happen before signing a lease.

“Unfortunately most people who come in here with leases have already signed on the bottom line,” Mr Feinauer said.

Many tenants did not take into account the cost of ‘making good’ a tenancy at the end of a lease, he said, where tenants have to return the premises to the state it was in at the start of the lease, giving consideration to fair wear and tear. 

‘Making good’ usually requires ensuring floor coverings, paint and windows are in the appropriate condition.

Mr Feinauer said that, in some cases, lease clauses even required the removal of partitioning.

For tenants that have outgrown their premises, the remaining years on its lease can be reassigned to second party. This common practice raises a number of issues, including liability, guarantees and assignment, which need to be considered early on.

Feinauer & Associates senior associate Adam Firth said it was important at the front end of a lease to ensure that conditions for re-assigning the lease were reasonable.

Mr Firth said all that any relevant clause should say was that the assigned lessee had to be responsible and financially sound.

Another important point, he said, was that liability and guarantees could remain in place after a tenant has vacated the premises unless the tenant has had such clauses written out of the lease. Any liability and guarantees surviving assignment give landlords the legal right to source target former tenants and guarantors if the assigned tenant defaults or leaves the premises.

“When tenant B stops paying, tenant A has to pay as if it is the tenant,” Mr Firth said.

Minter Ellison Lawyers partner in charge of property division, John Prevost, said in the case of companies, directors often gave personal guarantees on their lease. It was important, therefore, it was written into the lease that they be released from that guarantee upon assigning the lease.

Mr Prevost said that there were many examples of guarantors being sued. In one particular case a landlord went back to the original guarantee three years after the lease having been assigned, he said.