Exiting a Commercial Lease Early in Ontario: Your Options and the Risks

Business conditions change — sometimes dramatically and without warning. A business that signed a five-year commercial lease in year one may find itself needing to exit in year three because of declining revenue, a change in ownership, a better location, or simply a pivot in business model. In Ontario, exiting a commercial lease early is possible, but it is almost never simple and it is never free. Understanding your options — and their costs — before you act can save you from making an expensive mistake.

First: Understand What "Early Exit" Actually Costs

When you signed your commercial lease, you made a contractual commitment to pay rent and fulfil other obligations for the entire term. If you exit early without the landlord's agreement, you are in breach of that contract. The landlord's remedy includes recovering from you:

• All rent arrears owed up to the date of breach
• Damages for the loss of rent for the remainder of the term — less any amount the landlord recovers by re-leasing the space (the duty to mitigate)
• Out-of-pocket costs of re-leasing (broker commissions, tenant inducements to a new tenant, repair costs)

In practice, if you vacate a space with three years left on the lease and the landlord re-leases at the same rent after four months, you could owe four months of rent plus re-leasing costs. If the market has softened and the landlord re-leases at a lower rate, you could owe much more.

Understanding this exposure upfront helps you evaluate whether any of the options below are cost-effective.

Option 1: Check for an Early Termination (Break) Clause

Some commercial leases include an early termination clause (sometimes called a break clause) that gives one or both parties the right to terminate before the lease expiry. If your lease has one, it will specify:

• When the right can be exercised (e.g., only at the end of year 3 of a 5-year term)
• How much notice is required (typically 6–12 months)
• Whether a break penalty is payable (often equal to several months' rent)
• Conditions that must be met (tenant must not be in default at the time of exercise)

Break clauses are more common in office leases than retail leases. If yours does not have one, you cannot unilaterally exercise a right that does not exist — but you may be able to negotiate one into a lease amendment.

Option 2: Assign the Lease

As discussed in our companion article on assignment and subletting, assigning the lease transfers your obligations to a new tenant for the remainder of the term. If the assignment is completed with the landlord's consent and you obtain a written release, you are off the hook for future obligations.

This is the cleanest exit option — but it requires:

• Finding a creditworthy new tenant willing to take your space
• The landlord's consent (which cannot be unreasonably withheld, but which the landlord may condition on an exercise of their recapture right)
• Proper assignment documentation

Assignment as an exit strategy works best when you have time to find a successor tenant and when the space is desirable enough to attract one.

Option 3: Sublease the Premises

If assignment is not possible, subleasing lets you move out while a subtenant occupies the space and pays you rent. You remain liable under the head lease — the sublease does not eliminate your obligations to the landlord.

Subletting is a practical solution when:

• The landlord will not consent to a full assignment
• You need the space for part of the time but not all of it
• You want to exit a portion of the space (e.g., one floor of a two-floor office)

The risk: if the subtenant stops paying, you still owe full rent to the landlord. Do not sublet to a subtenant without assessing their financial viability.

Option 4: Negotiate a Lease Surrender

A surrender is an agreement between the landlord and tenant to mutually terminate the lease before its expiry. Unlike unilateral early exit, a surrender requires the landlord's cooperation — and their agreement to release you from future obligations.

Why would a landlord agree to a surrender?

• The landlord has a better tenant lined up for the space
• Market rents have risen significantly above what you are paying and the landlord wants to re-lease at a higher rate
• The landlord is redeveloping the property
• The landlord wants to avoid a protracted default situation

A surrender typically involves a surrender payment — a lump sum from the tenant to the landlord in exchange for the release. The amount is negotiated based on the remaining term, the landlord's estimated costs of re-leasing, and market conditions. A landlord who has a ready replacement tenant may accept a relatively small payment; one who faces a difficult re-leasing market may demand a large one.

Option 5: Default and Accept the Consequences

Some tenants, facing no other option, simply stop paying and vacate. This is rarely advisable but sometimes the only practical choice when the business has failed completely.

If you default and vacate:

• The landlord will likely distrain on any goods left on the premises
• The landlord will terminate the lease and pursue you (and any personal guarantor) for damages
• Your personal credit and business credit will be affected
• Legal proceedings are likely

If default is unavoidable, getting legal advice before vacating can at least help you minimize exposure — for example, by negotiating a consensual exit that avoids some of the landlord's re-leasing costs.

Frequently asked questions