Breaking a Commercial Lease: Legal Steps & Risks

Signing a commercial lease is a big step for any small business. It’s often the foundation for your shopfront, office, warehouse or studio - and it can feel like a turning point where things become “real”.

But sometimes circumstances change. Maybe your cash flow is tighter than expected, your foot traffic hasn’t returned, you’re relocating, downsizing, selling the business, or your business model has shifted online. Whatever the reason, you may be asking the same question many business owners ask: how to break a commercial lease without creating a legal and financial mess.

The good news is: you usually do have options. The less good news is: breaking a commercial lease can involve serious costs and risks if you handle it informally or assume you can “just give notice”.

Below, we’ll walk you through the common legal pathways, the practical steps to take, and the risks to watch out for - so you can make a clear plan and protect your business as best as possible.

Can You Break A Commercial Lease Early In Australia?

In most cases, you can’t simply “cancel” a commercial lease because you want to leave. A lease is a binding contract, and if you stop paying rent or walk away, you may be in breach.

That said, you can often exit early in one of these ways:

Negotiating a mutual termination (often with a surrender agreement).
Assigning the lease to another tenant (for example, as part of selling your business).
Subleasing all or part of the premises (if your lease permits it).
Relying on a break clause (if your lease includes one).
Terminating due to the landlord’s breach (in limited situations, and usually only with evidence and proper notice).
External events (in rare cases, such as frustration, where performance becomes impossible - this is uncommon and highly fact-specific).

The “right” option depends on your lease terms, whether it’s a retail lease or a general commercial lease, and what your landlord is willing to agree to.

If you’re already thinking about leaving, it’s usually worth getting the lease reviewed first so you’re negotiating from a position of clarity. A Commercial Lease Review can help you understand what the contract actually allows (and what it doesn’t).

Step-By-Step: How To Break A Commercial Lease The Right Way

If you’re searching for how to break a commercial lease, you’re likely looking for a practical roadmap. While each situation is different, the steps below are a strong starting point for most small businesses.

1. Check Your Lease For Exit Rights (And Hidden Traps)

Before you do anything, read your lease carefully (including schedules, annexures, disclosure statements, and any variations). Key clauses to look for include:

Term and option periods (and whether you’ve exercised an option).
Break clause (sometimes called an early termination clause).
Assignment clause (rules around transferring the lease to a new tenant).
Subleasing clause (whether subletting is allowed and under what conditions).
Make good clause (what condition you must return the premises in).
Outgoings (what you must pay during the lease, and whether any amounts may still be payable up to the effective end of the lease).
Personal guarantee provisions (which can impact you personally, not just the business).
Default and remedies (what happens if you stop paying or leave).

It’s also important to confirm whether your arrangement is actually a lease, or a licence. Some arrangements that look like “renting” are actually a Property Licence Agreement, which can have very different exit rules.

2. Work Out Your “Why” And Your Timeline

Landlords are more likely to negotiate when you’re clear and organised. Before contacting them, work out:

Your preferred exit date (and whether you can remain until then).
What you can afford (for example, a break fee, make good costs, or ongoing rent while a replacement is found).
Your best alternative if negotiations fail (assignment, sublease, business sale, etc.).
Whether you’re planning to sell your business and want to include lease transfer as part of the deal.

Having a clear plan helps you negotiate faster, and reduces the risk of making promises you can’t keep.

3. Approach The Landlord Early (And Keep Everything In Writing)

Once you understand your rights and strategy, speak to the landlord (or property manager) as early as possible. If you wait until you’re already in arrears, your options often shrink quickly.

Keep communications professional and in writing. If you discuss something by phone, follow up by email confirming what was said.

At this stage, you may propose:

a mutual termination (surrender) on agreed terms;
permission to assign or sublease;
a short rent reduction or rent abatement period while you find a replacement tenant;
a structured exit plan (for example, you pay rent for 8 weeks while marketing is underway, then the landlord agrees to release you if a new tenant is secured).

4. Document The Exit Properly

Even if your landlord is supportive, you still need the agreement documented properly. Verbal agreements or casual emails can lead to disputes later (for example, about whether you’re released from all liabilities or only some of them).

Depending on the path you take, the paperwork might include:

a deed of surrender (lease surrender agreement);
assignment documentation and landlord consent;
a sublease agreement (and consent);
a settlement deed dealing with money owed, make good, release and confidentiality.

If your lease is being transferred to someone else, you’ll usually want a clear release (or at least clarity on what you remain liable for). If you’re selling your business at the same time, an Asset Sale Agreement can be critical to align the lease handover with the rest of the transaction.

Practical Options: Break Clause, Surrender, Assignment Or Sublease?

Most small business lease exits fall into one of the options below. Each has different costs, timing, and risk levels.

Using A Break Clause (If Your Lease Has One)

A break clause is the closest thing to a “built-in exit”. It may allow you to terminate early if you meet certain conditions, such as:

giving written notice within a specific window;
paying a break fee;
having no outstanding rent or breaches;
restoring the premises (“make good”).

Break clauses can be strict. If you miss the notice period or don’t satisfy a condition, the break may be invalid and you could still be locked into the lease.

Negotiating A Mutual Termination (Lease Surrender)

If there’s no break clause - or it’s not workable - you can try to negotiate a surrender. This is where you and the landlord agree to end the lease early.

Landlords may agree if:

they can re-lease the premises quickly;
you offer a reasonable payout to cover their expected loss;
you have a good tenant history and want a clean exit;
vacancy risk is low in that area.

A surrender is often documented in a deed and should deal with rent, outgoings, make good, bond, release, and any disputes.

Assigning The Lease To A New Tenant

An assignment is a transfer of your lease to another person or business. This is common when:

you’re selling your business and the buyer wants the premises;
you’ve found someone to take over the site;
you’re exiting but the location is still attractive to the market.

Landlord consent is usually required. Many leases allow the landlord to request information about the incoming tenant and to impose reasonable conditions (but what is “reasonable”, and the process/timing for consent, can vary depending on your lease and the state or territory you’re in).

In Queensland, for example, business owners often also consider a lease transfer process when they’re assigning a lease as part of a broader sale or restructure.

One key issue: even after an assignment, you may still have some ongoing exposure in certain situations (for example, if your lease requires it, if a personal guarantee was given, or depending on the retail leasing rules in your state). Getting clear advice on your ongoing liability matters here.

Subleasing The Premises (All Or Part)

Subleasing means you remain the head tenant under your lease, but you rent the premises (or part of it) to another party.

This can be a practical option if you:

can’t exit completely but need to reduce costs;
only need part of the premises now;
have a lease term left that you can’t economically break.

Subleasing can reduce your financial burden, but it also comes with risk. If your subtenant doesn’t pay rent or damages the property, you’re usually still responsible to the landlord.

Risks And Costs When You Break A Commercial Lease

Understanding the risks up front helps you negotiate better and avoid expensive surprises. When you’re figuring out how to break a commercial lease, these are the common cost categories that can arise.

Ongoing Rent (And Landlord Loss Claims)

If you leave early without a documented agreement, the landlord may claim losses such as:

unpaid rent up to the date the premises are re-let;
rent and other amounts for the balance of the term (where permitted by the lease and applicable law, and usually subject to the landlord’s duty to mitigate loss);
outgoings and other amounts payable under the lease up to the date the lease actually ends (or up to when the premises are re-let, depending on the circumstances);
costs of finding a new tenant (for example, advertising and leasing fees), where the lease allows.

In many cases, landlords are expected to mitigate their loss (for example, by trying to find a replacement tenant), but that doesn’t mean your liability disappears.

Make Good And Dilapidations

“Make good” is one of the biggest pain points in commercial lease exits. Your lease may require you to:

remove fitout (or leave it, depending on the lease);
repair damage and repaint walls;
return the premises to base building condition;
repair signage or flooring;
professional clean the premises.

Make good costs can be significant - and the condition requirements are often more detailed than tenants expect.

Personal Guarantees And Security

If you signed a personal guarantee, the landlord may pursue you personally for lease debts even if your business is in financial distress or closes down.

You may also have a bond or bank guarantee in place. These can be called on if you’re in breach, depending on the lease terms and the nature of the dispute.

Insolvency Risks (And Director Duties)

If your business is a company and it’s struggling financially, lease obligations can interact with broader insolvency and director duty issues.

This is where early advice is especially valuable, because the “best” lease strategy might depend on your broader financial and legal position.

Common Mistakes Small Businesses Make When Breaking A Commercial Lease

When you’re under pressure, it’s easy to make decisions quickly - especially if rent is your biggest outgoing. But some mistakes can make the situation much harder to fix.

Assuming “Notice” Ends The Lease

Many business owners assume they can simply give 2–4 weeks’ notice and leave. In most commercial leases, that’s not how it works unless the lease allows it (for example, under a break clause).

Handing The Keys Back Without A Written Deal

Returning keys doesn’t automatically end your obligations. Without a documented surrender or assignment, you may still be liable for rent and other costs.

Not Checking Whether You’re In A Retail Lease Regime

Some premises fall under state-based retail leasing legislation (depending on the state or territory, the premises and the business type). This can affect disclosure requirements, consent processes, dispute resolution steps, and sometimes the enforceability of certain terms.

Even within the retail leasing space, the rules differ by state. If you’re in NSW, for example, it’s helpful to understand whether your premises is governed by the Retail Leases Act framework.

Entering A New Deal (Sublease/Assignment) Without Proper Paperwork

Assigning or subleasing “informally” might feel like a quick fix, but it can expose you to:

disputes about rent and repairs;
unclear responsibility for outgoings;
problems if the landlord never properly consented;
ongoing liability because releases weren’t documented.

Trying To Solve A Lease Problem Without Looking At The Whole Business

Sometimes the lease isn’t the only issue. Your staffing, suppliers, customer agreements and cash flow may all be connected.

For example, if you’re pivoting to online sales, you might also need updated customer-facing terms such as Website Terms and Conditions, plus a compliant Privacy Policy if you’re collecting customer details through your website.

Key Takeaways

In Australia, breaking a commercial lease early usually comes down to what your lease says and what you can negotiate - you typically can’t just “cancel” a lease without consequences.
Your main practical options are a break clause, a negotiated surrender, an assignment to another tenant, or a sublease (depending on your lease terms and landlord consent).
Breaking a commercial lease can involve major costs such as potential rent exposure, leasing fees, outgoings and make good obligations - so it’s worth planning before you act.
Personal guarantees, bonds and bank guarantees can increase your risk, especially if the business is under financial pressure.
Keeping everything in writing and documenting the exit properly is critical to avoid ongoing liability and future disputes.
A lease review can help you understand your exit rights and negotiate from a position of clarity, especially where the lease terms are strict or the business is being sold or restructured.

If you’d like help reviewing your lease or negotiating an early exit, you can reach us at 1800 730 617 or team@sprintlaw.com.au to discuss your situation.

How To Break A Commercial Lease: Legal Steps, Risks And Options