Things That Could Happen If You Break a Commercial Lease
Can I walk away from a commercial lease?
Whether you are a landlord or a tenant, your commercial lease binds you. This means you can walk away from the agreement, but the courts may penalize you for doing so. How you are penalized depends on who breaks the lease, how it is broken, and what your contractual lease dictates.
What happens if you break a commercial lease?
Surrender
If both the tenant and landlord mutually agree to end the lease early, then you can ‘surrender’ the lease by what is termed “operation of law”. Basically, this means that the tenant gives up possession of the premises, and the landlord accepts possession. Surrendering is often evidenced by the tenant returning the keys to the landlord; however, exchanging keys alone without more does not constitute a surrender (Marathon Realty Co. v. Pogon Professional Services Corp. (1994), 36 RPR. (2d) 264 (B.C. S.C.); Stearman v. Powers, 2017 CarswellBC 1066 (BCCA)). If the landlord or tenant breach their obligations and they do not consensually come to some arrangement like a surrender, then the other party can seek a remedy.
Breach
Landlords can terminate the lease if the tenant breaches their obligations. Most commonly,
landlords terminate leases because the tenant fails to pay rent. You should refer to your specific lease agreement to see how much time must pass before you can terminate the lease for non-payment of rent and how much notice of default you must give the tenant before you can act. After a prescribed time, landlords can re-enter and repossess the premises without warning the tenant in default. However, if landlords plan to recover lost rent, we advise them to inform their tenant that they plan to terminate the tenancy based on the non-payment.
Remedies
If a tenant breaches their contractual obligations, the landlord can choose one of the following remedies and must then notify the tenant of the elected option.
Demand the tenant performs the contractual terms and sue for rent or damages based on the lease remaining in force. Check your commercial lease to see if it allows you to recover legal costs incurred against the tenant to enforce the contract. Your contract may even allow to you collect interest on overdue amounts.
Terminate the lease and sue for rent due or damages to the date of termination for previous breaches of the covenant.
Advise the defaulting tenant you want to lease the premises to a new tenant on the defaulting tenant’s account, meaning the defaulting tenant is still liable on the lease.
Terminate the lease but give notice to the defaulting tenant that you will claim damages based on the fact you lost the benefit of the lease over its unexpired term (Highway Properties Ltd. v. Kelly, Douglas & Co., [1971] S.C.J. No. 55, 17 D.L.R. (3d) 710 (S.C.C)). If chosen, the landlord has a duty to mitigate their loss, meaning the landlord must make reasonable efforts to reduce the losses caused by the tenant defaulting on rent (e.g. rent to a new tenant).
On the flip side, tenants can also terminate lease agreements. In practice, it looks different. As per the lease, landlords must meet their obligations, such as providing utilities or maintenance. If the landlord fails to do so, then the landlord may have violated the lease. However, this breach does not excuse tenants from paying rent. Rather, tenants must continue paying rent, but they may apply to a court to order the landlord to fulfill their obligations. Relative to tenants, commercial landlords have few obligations and, thus, it is less common for landlords to breach leases.
If you are a landlord or tenant thinking about breaking your lease or starting legal action, book a free consultation with us to learn what to do.
