Canada’s business environment is under growing pressure – from the lingering after-effects of the pandemic to the mounting threat of global tariffs and the economic uncertainty they bring. For many businesses, the ripple effects have been tangible: reduced headcounts, a shift to hybrid and remote work, and fundamentally changed space requirements have altered how – and where – businesses operate. In many cases, these pressures have forced a difficult question: can we break our commercial lease early? Breaking a commercial lease is more common than many tenants realize – but it is rarely simple, and the consequences of getting it wrong can follow you long after you have vacated the premises. This article explains your practical options and why the most important first step is always to carefully read the lease you signed.
Once you have committed to a commercial lease, the question of how to exit that commitment is governed first and foremost by the lease itself – not by the Commercial Tenancies Act. The Act is largely a permissive, default statute: its provisions fill in gaps where the lease is silent, but where the lease speaks, the lease governs. In practice, a well-drafted commercial lease will address virtually every relevant situation, and the Act’s default rules will rarely come into play.
Commercial leases in Ontario vary considerably in their terms and are generally subject to the Commercial Tenancies Act. Rent is typically structured as a combination of base rent – a fixed amount per square foot – and additional rent covering the tenant’s share of operating costs such as property taxes, building insurance, and maintenance, commonly referred to as TMI or CAM charges. A lease will also typically address building services, permitted use, repair obligations, and the conditions for termination. Rather than cataloguing every possible provision, what matters most for a tenant considering an exit is whether the lease contains termination rights, assignment and subletting provisions, and clarity around financial obligations – all of which are addressed in the steps below.
Navigating an Early Exit
Navigating an early exit from a commercial lease almost always comes down to three questions: does the lease already contain exit mechanisms; can a negotiated solution be reached with the landlord; and could a sublease or assignment provide the relief you need? The steps below address each in turn. Litigation and other legal remedies exist but should generally be viewed as a last resort.
Step 1: Read Your Lease – Look for Exit Provisions
Your lease may already contain provisions that give you a legitimate early exit – without needing to litigate or even negotiate extensively. Common provisions to look for include: an early termination or ‘break’ clause, which may allow you to end the lease on specified notice (often subject to a penalty payment); rights to assign the lease or sublet the premises to another party; demolition or redevelopment clauses that may permit termination in certain circumstances; and any conditions precedent that must remain satisfied for the lease to stay in force. Many commercial leases – particularly those signed in competitive markets – will not contain generous exit provisions. But if yours does, these are your first and best port of call. Review every clause carefully and ideally do so with legal counsel.
If your lease does not contain any express exit provisions, the Commercial Tenancies Act will generally offer you little relief – particularly if you are in a fixed-term lease. The Act’s notice provisions apply primarily to periodic (month-to-month) tenancies and will not allow you to unilaterally terminate a fixed-term lease. In short: if the lease does not give you an out, the statute is unlikely to either.
Step 2: If There Are No Exit Provisions, Negotiate With Your Landlord
If your lease contains no useful exit mechanisms, your most practical option – and often your best one – is to have an honest and early conversation with your landlord. This may seem counterintuitive, but landlords are frequently willing to negotiate an early exit, because the alternative – a tenant who is struggling to pay rent and ultimately defaults – is often far worse for them. A defaulting tenant means unpaid rent, legal costs, a potentially lengthy eviction process, and the time and expense of finding a replacement. It is equally important to understand what walking away without agreement means for you: a landlord is entitled to hold you to the lease, and while they have a duty to mitigate their losses by attempting to re-let the premises, they are not required to do so immediately or on unfavourable terms. Until a replacement tenant is found – if one is found – you remain liable for rent, and a judgment against you for arrears can have serious consequences for your business finances and credit. A negotiated exit, by contrast, gives the landlord certainty and the opportunity to re-let the premises on their own terms. Coming to that conversation early, before you are in arrears, will put you in a much stronger position.
When approaching your landlord, come prepared with a concrete proposal. Depending on your circumstances and the remaining lease term, you might offer to: assist in finding a suitable replacement tenant; pay a negotiated termination fee; or forfeit your security deposit. The clearer you can make the case that a negotiated exit is better for the landlord than a default, the better your chances. Any agreement reached should be documented in a formal surrender agreement – also known as a deed of surrender – which is a written contract signed by both parties that formally brings the lease to an end and expressly releases you from all ongoing obligations under it. A handshake deal or an exchange of emails is not sufficient and will not protect you if the landlord later claims you remain bound by the lease.
As you prepare for negotiation, it is worth considering what legitimate leverage you may have. If the landlord has breached any terms of the lease – for example, by failing to maintain the premises, failing to provide promised services, or interfering with your use of the property – this may provide some negotiating leverage and could be raised as part of your discussions. However, it is important not to overplay this hand: most commercial leases contain express waivers of set-off rights, meaning you cannot simply deduct amounts you believe are owed by the landlord from your rent. Ontario courts have generally given effect to these waivers, though the outcome will always depend on the specific language of your lease. Withholding rent unilaterally – even if you believe you have a legitimate grievance – can expose you to a claim for arrears and weaken your negotiating position considerably. Where the landlord’s conduct is more serious, different considerations apply. In limited circumstances, a landlord’s breach may give rise to legal remedies – including a right to treat the lease as terminated and to claim damages. Ontario courts recognize this, but the threshold is high, and a tenant who wrongly treats a lease as terminated may find itself liable for the balance of the rent it stopped paying. These are remedies of last resort, not practical strategies for a business dealing primarily with financial difficulty. If you believe your landlord has breached the lease in a material way, seek legal advice before taking any action.
Step 3: Consider a Sublease or Assignment
Sublease Agreement
A sublease is an arrangement in which you, as the original tenant, rent all or part of the leased premises to a third party (the subtenant) for a period that does not exceed the remaining term of your head lease. Unlike an assignment, a sublease does not transfer your leasehold interest – you remain a party to the head lease and continue to be directly liable to your landlord. A sublease may offer useful flexibility, particularly if you wish to offset your rent obligations, but it does not provide a clean break from the lease. Once consent is obtained, you will need to prepare a written sublease agreement signed by both you and the subtenant. The sublease should clearly set out the rent, the term, the permitted uses of the premises, and the respective obligations of both parties. Importantly, the sublease should mirror the key tenant obligations under your head lease – including requirements relating to permitted use, insurance, maintenance, and any other material covenants. Since you remain liable to the head landlord if the subtenant causes a breach of the head lease, ensuring those obligations flow down to the subtenant gives you a direct contractual right of recourse against them if they do.
If the subtenant defaults or vacates early, the rent and other financial obligations under the head lease remain yours to meet – so choose your subtenant carefully. The sublease should also address a number of practical matters: a damage deposit (there is no statutory cap for commercial subleases, so the amount is negotiable, though one month’s rent is commonly used as a reference point); a requirement that the subtenant maintain their own insurance; and the extent of any permitted alterations and uses of the premises – none of which can exceed what is permitted under the head lease.
Assignment Agreement
A cleaner alternative to subleasing is to assign the lease entirely to a new tenant – also known as a lease transfer. Unlike a sublease, an assignment transfers your entire remaining interest in the lease to the new tenant, and you step out of the relationship entirely. The responsibilities of paying rent, overseeing repairs, and other obligations will transfer to the new tenant following the assignment. The rent does not change and, typically, a new lease agreement with the landlord is not required. A lease assignment also revokes your right to return to or occupy the property. This is generally a preferable outcome for a tenant looking for a clean break. However, the critical caveat is this: unless the landlord provides you with an express written release, you may remain liable to the landlord for unpaid rent or other breaches by the assignee, even after the assignment has taken place. It is also important to check whether your lease contains an express ‘original tenant liability’ clause – a provision that explicitly preserves your liability for the full remaining term of the lease regardless of any assignment. Where such a clause exists, even the landlord’s consent to the assignment will not automatically release you; only an express written release will. Securing a formal written release from the landlord must therefore be treated as an essential condition of any lease assignment – not an afterthought.
Both a sublease and an assignment will require the landlord’s prior written consent, and in both cases the request should be made formally and in writing. Importantly, under section 23(1) of the Commercial Tenancies Act, where a lease contains a covenant against assignment or subletting without the landlord’s consent, that consent cannot be unreasonably withheld – however, unlike in residential tenancies, this protection can be expressly excluded by the terms of a commercial lease. Where the lease does not exclude it, Ontario courts have found that a landlord who delays unreasonably, or who attaches conditions designed to extract a collateral benefit – such as requiring a demolition clause as a condition of consent – will be found to have unreasonably withheld consent. Most leases specify the process and criteria for granting consent – review those provisions carefully before approaching the landlord, as failure to follow the required process can affect your rights.
Getting Legal Advice
Breaking a commercial lease is rarely straightforward, and the consequences of getting it wrong – including continued liability for rent on premises you no longer occupy – can follow you for years. The practical takeaway is this: read your lease first, identify any exit provisions, and if there are none, approach your landlord early and in good faith before you are in default. Most landlords would rather negotiate than deal with a tenant who has stopped paying rent. Whatever you agree on, get it in writing and make sure it includes a full release of your obligations. The unfortunate reality is that economic shocks – whether from a global pandemic, trade disruptions, or shifting market conditions – consistently drive a rise in businesses seeking to exit or renegotiate commercial leases, and the consequences can extend well beyond rent: they may affect your workforce, your customer relationships, and your core business operations. If you are facing this situation, do not wait until you are in default. Contact our team today – our commercial lawyers can review your lease, explain your options, and make sure any exit is properly documented and fully protective of your interests.
Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. It should not be relied upon as a substitute for professional legal counsel. Laws and regulations may change over time, and the application of any legal principle will depend on the specific facts and circumstances of each matter. Readers are encouraged to consult with a qualified lawyer before acting on any information contained in this article.
