Surrender Of Lease Agreement: What Tenants Should Check

Can you just agree to end your commercial lease early and hand back the keys? Usually, yes, but you don't want to leave the details floating in emails or a handshake.

A surrender of lease can be a clean way to move on from premises that no longer suit your business. The catch is that rent, make good, guarantees, bonds and release of liability can all cause headaches later if they're not dealt with properly.

The good news is that this doesn't have to be complicated. A carefully drafted deed of surrender can turn a difficult exit into a clear commercial arrangement, so everyone knows what's paid, what's released and what still needs to happen.

Do You Need A Deed Of Surrender To End A Commercial Lease Early?

Yes, in most cases you should use a deed of surrender if you're ending a commercial lease early by agreement. It gives both sides a clear written record that the lease is ending and sets out the terms of that exit.

A commercial lease surrender is different from simply reaching the end date of the lease. If your lease expires naturally, you may only need to deal with final rent, outgoings, make good and key handover. If you're ending it early, the landlord is giving up the right to future rent and you may be giving up rights to occupy the premises, incentives or fitout arrangements.

A deed is commonly used because it can be binding even where one side isn't paying fresh consideration in the usual contract sense. It also signals that the parties intend the arrangement to be formal and final.

Your deed should clearly identify:

• The landlord, tenant and any guarantors
• The premises and lease being surrendered
• The exact surrender date and time
• Any money to be paid before or on surrender
• What happens to the bond or bank guarantee
• Whether guarantees and future liabilities are released
• What make good work must be done, and by when

If the lease is a retail lease, your state or territory retail leasing laws may also affect what can be agreed and what disclosures or processes apply. The rules aren't identical across Australia, so it's worth checking the position in your state before signing.

What Should A Surrender Of Lease Agreement Include?

A lease surrender agreement should include every term needed to close off the lease relationship without leaving loose ends. The safest approach is to assume that if it's not written down, it may be argued about later.

At a minimum, the deed should state the legal names of the parties. For companies, use the correct company name and ACN from ASIC records, not just the trading name. If your business trades under a business name, the legal entity behind it still needs to sign.

The deed should then describe the lease. This usually means the lease date, premises address, parties, any variations, any option or extension of lease documents and any registered lease number if the lease was registered.

A Practical Clause Outline

This outline isn't a finished legal document, but it shows the key sections a lawyer would usually tailor before you use it:

1. Parties: Insert the landlord, tenant and guarantor details, including ACNs where relevant.
2. Background: Describe the lease, premises, variations and why the parties are ending it early.
3. Surrender Date: State the exact date and time the lease ends and possession must be handed back.
4. Payments: List arrears, surrender fee, outgoings, interest or agreed settlement amounts.
5. Make Good: Set out what works must be done, who pays, deadlines and inspection rights.
6. Bond Or Bank Guarantee: State when it will be returned, released or drawn on.
7. Release: Confirm which past and future claims are released, and which obligations survive.
8. Guarantees: Confirm whether personal or director guarantees are discharged from the surrender date.
9. Handover: Cover keys, access cards, security codes, equipment and vacant possession.
10. Execution: Include proper deed signing blocks for individuals and companies.

A template may miss details that matter in your lease, especially around incentives, fitout ownership and guarantees. This is one of those documents where tailoring usually saves more trouble than it costs.

How Should Rent Arrears, Outgoings And Incentives Be Dealt With?

They should be dealt with expressly, because money disputes are one of the most common problems after a lease surrender. Your deed should say exactly what is owed, what is waived and when payments are due.

Start by reconciling all amounts up to the surrender date. This may include:

• Unpaid rent
• Outgoings and utilities
• Interest on overdue amounts, if the lease allows it
• Marketing levy or centre charges, if relevant
• Repair costs or cleaning costs
• Any agreed surrender payment to compensate the landlord

If you've received a lease incentive, check whether the lease lets the landlord claw back part of it if you leave early. For example, a landlord may have paid a $60,000 fitout contribution on a 5 year lease. If you surrender after 2 years, the lease or fit out agreement might require repayment of the unexpired portion, or 3 years' worth of the incentive. The deed should confirm whether that amount is payable, reduced or waived.

Say you run a cafe in Brisbane and your lease has 18 months left. You're $8,000 behind in rent, the landlord says $3,500 is owed for outgoings, and your bank guarantee is $20,000. You agree to surrender the lease on 31 March, pay $6,000 on signing, and allow the landlord to deduct $5,500 from the bank guarantee for the remaining arrears and cleaning. The deed should spell that out clearly, including when the balance of the bank guarantee must be returned.

Don't rely on broad wording like "the parties will sort out final amounts later". If there's a genuine unknown, such as final outgoings that won't be issued until the end of the financial year, set out the method for calculating it, when it will be invoiced and when it must be paid.

You should also check whether GST applies to any surrender payment, make good payment or settlement amount. The deed should state whether amounts are inclusive or exclusive of GST, and whether a tax invoice is required before payment.

What Happens To Make Good, Fitout And Handover?

Make good is often the most practical part of a lease surrender, and also one of the easiest to underestimate. Your lease might require you to remove partitions, signage, kitchen equipment, cabling, flooring or other alterations, then repaint and repair the premises before you leave.

Before you sign, read the make good clause closely and compare it against the current condition of the premises. If the landlord is willing to accept the premises as is, say that clearly in the deed. If only some works are required, list them with enough detail that both sides can tell when they're complete.

For example, a vague clause saying "tenant to make good" can lead to a dispute about whether you needed to remove air conditioning, polished concrete, plumbing or a shopfront sign. A clearer clause might say the tenant must remove branding, patch walls where shelving was fixed, professionally clean the premises and leave the approved kitchen exhaust in place for the landlord.

The deed should also deal with ownership of fitout and equipment. Some items may belong to you, some may belong to the landlord, and some may be subject to finance or supplier arrangements. If you're selling or leaving equipment behind, document whether the landlord is buying it, accepting it at no cost, or simply allowing it to remain without taking responsibility for its condition.

On the handover side, include the practical details. This can cover the date and time for vacant possession, return of keys, swipe cards and remotes, disabling alarm codes, final meter readings, removal of stock and rubbish, and any final inspection. If you need access after the surrender date to finish works, make sure the deed allows this. Otherwise, you may technically have no right to re enter the premises after the lease ends.

What About Guarantees, Bonds And Releases?

If you signed a personal guarantee, director guarantee or gave a bank guarantee, don't assume these automatically disappear the moment you hand back the keys. The deed should say exactly what happens to them.

For guarantors, the key question is whether they're released from all future liability from the surrender date. A landlord will often want to preserve claims for things that happened before surrender, such as unpaid rent or damage. That can be reasonable, but the wording should be clear so guarantors aren't exposed to fresh rent or obligations after the lease has ended.

For a bond or bank guarantee, the deed should confirm whether it will be:

• Returned in full on or shortly after the surrender date
• Partly applied to agreed debts or make good costs
• Held for a short period pending final outgoings or repairs
• Released only after final inspection or payment of all agreed amounts

If the landlord is keeping part of the security, the deed should explain the amount, purpose and evidence required. For example, if money is held for make good works, you might ask for tax invoices or quotes, with any balance returned within a set timeframe.

The release clause is also important. Tenants usually want a broad release from rent and obligations after the surrender date. Landlords usually want carve outs for unpaid amounts, damage, confidentiality, indemnities or obligations that are intended to survive. There isn't one standard answer, but there should be no surprises.

If the lease was registered on title, you may also need a formal surrender or registration document lodged with the relevant land titles office. The deed should make clear who prepares and signs those documents, who pays lodgement costs and when registration must happen.

Common Mistakes To Avoid Before Signing

A surrender deed is usually signed when both sides are keen to move on, which means important details can get rushed. Before signing, slow down and check the commercial points line by line.

One common mistake is leaving guarantors out of the document. If a guarantor signed the lease, they should usually be a party to the deed too, especially if the deed is meant to release or confirm their continuing obligations. Otherwise, you can end up with uncertainty about whether the guarantor agreed to the deal.

Another mistake is agreeing to a surrender date without confirming when your replacement premises, stock removal, staff roster and customer notices will be ready. If you can't hand over vacant possession on time, you may face extra rent, occupation fees or claims for delay.

Tenants also sometimes forget to check side documents. Your lease package may include an incentive deed, licence for outdoor seating, car park licence, storage licence, signage agreement, disclosure statement or side letter. If those documents continue or create extra obligations, the surrender deed should address them.

Finally, make sure the deed is signed correctly. Individuals generally sign in their own name. Companies should sign in accordance with their constitution and usual company execution rules, often by directors or a director and secretary. If the deed is signed electronically, confirm that electronic execution is acceptable for the document and parties involved.

It's a good idea to get legal advice before you sign, particularly if there are arrears, a large bond, a personal guarantee, an incentive clawback or a dispute about make good. A short review before signing is usually much easier than trying to fix unclear wording after you've already left.

Key Takeaways

• A deed of surrender is the usual way to formally end a commercial lease early by agreement.
• The deed should clearly cover the surrender date, payments, make good, handover, bonds, guarantees and releases.
• Don't leave rent arrears, outgoings, incentives or GST to be worked out later. Set out the amounts or calculation method.
• Make good obligations should be specific, practical and matched to the actual condition of the premises.
• If guarantors or bank guarantees are involved, the deed should say exactly what is released, retained or returned.
• Retail lease rules and registered leases can add extra steps, so check the position before signing.

If you'd like help with reviewing your surrender deed, negotiating make good terms, dealing with guarantees or preparing lease surrender documents, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.