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Breaking A Lease

Closing Your Business

What are your obligations to the landlord when you cease trading during the term of your lease? If your business has a lease that has not expired, you are liable for the full payment of rent and outgoings as per your signed lease documents. The full term of the lease is payable, not just the period until you vacated the premises, unless you have a written agreement with the landlord to state otherwise. We often have clients believe that their lease does not need to be included in their business bankruptcy at the full term of the lease, as they hope that the landlord will just re-lease the premises. This is not necessarily the case and even if the the landlord finds a new tenant and you owe nothing, the situation is precarious. For instance the Landlord has indeed found another tenant and you had 3 years to go on that lease. If the new tenant defaults after 12 months, you can still be held liable for all the costs as you are the entity that signed the original lease, which is a binding contract under Australian law.

Bankruptcy And Leases

What happens if you simply have to stop trading as the business is running at a loss? Trading at a loss would in most normal circumstances be trading insolvent. You should stop trading so that you don’t increase your amount of debt and potentially disappoint some of your creditors as well. If you have to look at bankruptcy as an option, your lease term can be included in the amount of debt that is written off if you are breaking a lease. Do not omit it, as it can easily become a future problem. Your landlord will have to carry this debt, since neither the landlord or other creditors, subject to your bankruptcy, get reimbursed.

Many people actually believe that the government is paying their debts when they go bankrupt. This is false and it is important to understand that you potentially increase the burden on other businesses and their families if you continue trading when you can not catch up on your debts. It is time to cease trading and take stock of the situation, minimising any further financial damage to others. So yes, your lease obligations are covered under bankruptcy, however if you are not entering into bankruptcy you are liable for your full term lease obligations.

If you can come to an arrangement with your landlord to cancel your obligation in lieu of finding a new tenant, ensure that the new tenant signs a new lease and not a sub-lease and request written confirmation that clears you of any further claim by the landlord. This will prevent any future monetary claims from you if the new tenant defaults on the lease.