How Do I End a Commercial Lease Agreement in NZ? | NZ Legal

Commercial leases are long-term commitments. A typical NZ lease runs for 3 to 12 years, and the financial exposure — rent, outgoings, make-good — can easily total hundreds of thousands of dollars. But businesses change. Leases that made sense when they were signed often need to be exited before the term expires.

This article explains every exit route available under New Zealand law, from natural expiry through surrender, assignment, subletting, and the consequences of default.

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Exit Route 1: Natural Expiry

The simplest exit is allowing the lease to expire at the end of its term. If you have renewal options that you do not want to exercise, you must ensure you do not inadvertently trigger the renewal by holding over or failing to give timely notice under the lease.

Make-good obligations

Most commercial leases require the tenant to “make good” the premises before vacating — returning the space to the condition specified in the lease (typically the condition at commencement, fair wear and tear excepted). This can involve:

• Removing tenant fit-out (partitioning, joinery, shelving, signage).
• Patching walls, repainting.
• Reinstating floor coverings.
• Returning services to base-build configuration.

The cost of make-good can be substantial — budget $30,000 to $150,000+ for office fit-outs depending on size and spec. Some landlords accept a cash payment in lieu of physical make-good if they intend to refit for a new tenant anyway.

1. 6 months before expiry

   Review your lease obligations

   Confirm the expiry date, any notice requirements, and the full scope of make-good. If you have renewal options you are not exercising, check whether they need to be formally declined in writing.

2. 3–4 months before expiry

   Commission a make-good assessment

   Get a contractor or quantity surveyor to assess the cost of complying with your make-good obligations. Approach the landlord about a cash-in-lieu settlement if preferable for both parties.

3. 4–6 weeks before expiry

   Begin make-good works

   Complete reinstatement works. Allow time for snagging and any landlord inspection.

4. Expiry date

   Vacate and hand over keys

   Confirm hand-over in writing. Retain evidence of the property’s condition (photos, a make-good report) in case of any dispute about reinstatement.

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Exit Route 2: Surrender (Early Exit by Agreement)

If you want to leave before the lease term expires, the starting point is to look at your lease’s termination clauses. Most standard ADLS commercial leases do not permit the tenant to terminate early unless a specific no-access event applies (e.g. clause 27.5, which deals with emergencies like earthquake or the COVID-19 lockdowns).

Absent a contractual right to terminate, you need the landlord’s agreement. A landlord is not required to agree to an early surrender.

Negotiating an exit payment

Landlords will typically only agree to early surrender if they are adequately compensated. An exit or surrender payment reflects the landlord’s loss of the benefit of the remaining lease, and may include:

• Rent for the remaining term (or a portion of it).
• Any incentives the landlord provided at the start of the lease (fit-out contributions, rent-free periods).
• The landlord’s costs of finding a new tenant (letting fees, marketing, vacancy period).
• Make-good.

The payment is negotiable. Factors that reduce it include: a strong market with plenty of demand for the space; the tenant being in a sector the landlord wants to attract for the broader building; or the landlord wanting to redevelop the space.

Deed of Surrender

If surrender is agreed, it must be documented in a formal Deed of Surrender signed by both parties. The deed should:

• Confirm the surrender date and any payment due.
• Address make-good — either confirming it has been completed or setting a cash settlement figure.
• Release both parties from future obligations under the lease.
• Release any personal guarantors.
• Confirm whether any incentives need to be repaid.

Do not vacate without a signed deed. Vacating without agreement does not end your liability.

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Exit Route 3: Assignment

Assignment involves transferring the lease to an incoming tenant who steps into your shoes. Under the ADLS Deed of Lease, you require the landlord’s consent to assign, but the landlord cannot unreasonably withhold consent if the proposed assignee:

• Is financially capable of meeting the rent and outgoings.
• Is of good character and reputation.
• Will use the premises in accordance with the permitted use.

Process for assignment:

1. Step 1

   Find a proposed assignee

   You are responsible for finding a tenant willing to take on your lease obligations — the landlord is not. Engage a commercial real estate agent if needed.

2. Step 2

   Seek landlord consent

   Provide the landlord with the proposed assignee’s financial information, references, and proposed use. The landlord has a reasonable period to consider (typically 10 working days under the lease).

3. Step 3

   Landlord approves or declines

   If the landlord approves, proceed to documentation. If the landlord declines on arguably unreasonable grounds, legal advice should be obtained — you may have a remedy.

4. Step 4

   Execute Deed of Assignment

   A Deed of Assignment is signed by the assignor (you), assignee, and landlord. It transfers the lease and confirms each party’s obligations going forward.

Ongoing liability after assignment

This is a critical point many tenants miss: assignment does not automatically release you from liability. If the assignee defaults, the landlord may have recourse against you for the shortfall. Under the standard ADLS form:

• Liability continues for the current term but not into any renewal term.
• You can negotiate with the landlord to cap your ongoing liability to a specified amount or period.

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Assignment gets you out of the building without a lump-sum exit payment — but it does not wipe your liability if the new tenant defaults. Negotiate a cap on your ongoing exposure when executing the Deed of Assignment.

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Exit Route 4: Subletting

Subletting is an option if you do not need all of your leased space but are not ready to exit entirely. You can sublet a portion (or all) of the premises to a subtenant.

Key characteristics of a sublease:

• You remain the tenant under the head lease — you are still responsible for all rent and outgoings to the landlord.
• The subtenant pays you rent (which partially offsets your obligations).
• You become a landlord in your own right for the sublet portion.
• Landlord consent is required, and cannot be unreasonably withheld.
• The sublease must not allow uses inconsistent with the head lease.

Risks of subletting:

If the subtenant defaults, you still owe the head lease obligations. Carry out proper due diligence on any subtenant — financial position, business reputation, and proposed use. Consider requiring a personal guarantee from the subtenant.

A Deed of Sublease should be formally documented to avoid ambiguity about shared costs (utilities, insurance, outgoings), make-good obligations, and access rights.

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Exit Route 5: Landlord Remedies for Tenant Default

If a tenant defaults — typically by not paying rent — the landlord has significant remedies under the Property Law Act 2007 and the lease.

Section 245 notice (Property Law Act 2007)

Before a landlord can re-enter or terminate a commercial lease for non-payment of rent, they must serve a written notice on the tenant (and any guarantors) under section 245 of the Property Law Act 2007. The notice must:

• Specify the default (amount of arrears and period).
• Require the tenant to remedy the default within a reasonable time (typically not less than 12 working days for non-payment of rent).
• Warn that if the default is not remedied, the landlord may cancel the lease.

If the tenant does not pay within the notice period, the landlord may re-enter the premises and cancel the lease. A lockout is a serious event — obtain legal advice immediately if you receive a section 245 notice or find yourself locked out of your premises.

Other landlord remedies:

• Distress (seizing goods): No longer available for commercial leases in NZ since the Property Law Act 2007. Landlords cannot simply seize your assets.
• Rent arrears claim: The landlord can sue for unpaid rent regardless of whether the lease is terminated.
• Guarantee enforcement: If a personal or corporate guarantee has been given, the landlord can pursue the guarantors directly.
• Reletting at the tenant’s risk: If the landlord relets the premises after cancelling the lease, the outgoing tenant may still owe the difference between the new rent and the old rent for the remaining term.

Exit Route	Cost to Tenant	Speed	Landlord Consent Required	Ongoing Liability
Natural expiry	Natural expiry	Make-good only	Planned	No (unless renewal declined)	None after vacating
Surrender (early exit)	Surrender	Exit payment + make-good	Negotiated	Yes	Released by deed
Assignment	Assignment	Legal fees + make-good	Weeks to months	Yes	Residual (unless capped)
Subletting	Subletting	Legal fees	Weeks	Yes	Full (you remain tenant)
Default / abandonment	Default / abandonment	Very high — arrears + reletting shortfall + legal costs	Immediate (but unplanned)	No (but landlord acts)	Ongoing until landlord mitigates

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What Not to Do: Abandonment

Abandoning the premises — simply vacating and stopping payment — is not an exit strategy. It is a breach of contract with serious consequences:

• The lease obligations continue until the lease expires or the landlord formally cancels it.
• The landlord can pursue you for all arrears and reletting costs.
• Any personal guarantors are exposed.
• The landlord may not be obliged to mitigate quickly — especially if the market is soft.

Do not abandon. Every exit option above is better than abandonment.

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Force Majeure and No-Access Events

The ADLS Lease (Sixth Edition) includes clause 27.5, which provides for a rent abatement where the tenant is unable to access the premises due to an emergency — for example, an earthquake, flooding, or (as litigated extensively during COVID-19) a government-mandated closure. This is not a general exit right; it is a temporary abatement mechanism for genuine inaccessibility events.

If you believe a force majeure event applies to your situation, obtain legal advice before stopping rent payments.

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Getting Advice

Exiting a commercial lease requires careful planning and negotiation. The earlier you engage a property lawyer, the more options you have.

If you want to exit a commercial lease

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1. Review your lease to understand the expiry date, make-good obligations, and any early termination rights.
2. Check whether any incentives are subject to repayment on early exit.
3. If exiting early, approach the landlord early and engage a lawyer before making any proposals.
4. Never stop paying rent without legal advice — the consequences are severe.
5. If assigning, document ongoing liability cap in the Deed of Assignment.
6. If subletting, carry out proper subtenant due diligence and document the sublease formally.
7. If you receive a section 245 notice, respond immediately and seek legal advice.

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This article is general information only and does not constitute legal advice. Lease exit strategies are highly fact-specific and depend on the exact terms of your lease. Always obtain legal advice before taking any steps to exit a commercial lease.

Get in touch with NZ Legal for help negotiating your commercial lease exit.

Sources

1. Property Law Act 2007Governs landlord remedies for tenant default, re-entry, and cancellation of commercial leases.
2. ADLS Deed of Lease (Sixth Edition 2012, revised 2021)The standard form NZ commercial lease — governs assignment, subletting, and surrender procedures.
3. Contract and Commercial Law Act 2017Relevant to frustration of contract and force majeure provisions.