Written byA termination fee is a contractual charge for ending an agreement before its agreed end date, or for triggering a contract exit event.
Also known as: break fee, early termination fee, cancellation fee
Key points
- Same idea, different labels: lease break fee, early termination charge, reletting costs, cancellation fee, exit fee or corporate break fee.
- The amount may be a fixed sum, the remaining instalments, a percentage of contract value, or an estimate of the provider's actual loss.
- A sum out of all proportion to the legitimate interests the clause protects is a penalty and will not be enforced.
- In standard-form consumer and small business contracts the unfair contract terms rules can make the clause void.
- The other side has to mitigate: a landlord must try to re-let, which reduces what can be recovered from you.
Where termination fees show up
Leases are the classic case: a tenant ends a fixed term early and the landlord claims reletting costs or a break fee. Telcos and energy retailers charge early termination fees for leaving a fixed-term plan, and gyms, subscriptions and club memberships have their own cancellation terms. Consultancy, IT and construction contracts often include a termination-for-convenience clause with a pre-agreed sum.
In finance, commercial loans, equipment finance and hire purchase can carry early repayment or exit fees, which turn up in the payout figure when you ask for early settlement. Exit fees are banned on regulated home loans taken out from 1 July 2011, so on a fixed rate home loan what you meet instead is break costs. In corporate deals a break fee compensates a target or a bidder when the transaction falls over. Whatever the label, check the clause that defines the trigger and the calculation.
How the fee is worked out
There is no single method. Common approaches are a fixed sum, the remaining instalments added up and sometimes discounted, an adjustment for prepaid services you never used, a formula tied to expected losses such as marketing and reletting costs, or the cost of replacing the customer or the asset.
A widely used formula is the monthly fee times the remaining months, less a mitigation credit for anything the provider recovers. On a 12 month service at $80 a month, cancelling after four months leaves eight months, or $640; if the provider signs a replacement worth $200, the reasonable fee is $440. Ask for that calculation in writing, itemised, with the supporting invoices.
When it is enforceable, and how to push back
Three principles decide it. A sum that is extravagant or out of all proportion to the legitimate interests the clause protects is a penalty and will not be enforced, with a genuine pre-estimate of loss at the safe end of that spectrum. In standard-form consumer and small business contracts, a term can be declared void as unfair where it causes a significant imbalance, is not reasonably necessary to protect a legitimate interest and would cause detriment. And the claiming party must mitigate: a landlord has to advertise and re-let, a supplier has to seek replacement business.
If you think a fee is wrong, read the clause, ask for an itemised breakdown, gather evidence of mitigation, and use the provider's internal complaints process first. If that fails, escalate: the Telecommunications Industry Ombudsman for telco disputes, your state tenancy authority for reletting, the ACCC for unfair terms.
Example
A cafe tenant leaves a five year commercial lease after three months, and the landlord claims the rent for the rest of the term as a break fee. The tenant asks for evidence of the loss. The landlord advertises and re-lets the shop, so the recoverable amount shrinks to the rent lost while the place sat empty plus the reletting expenses actually incurred. The original claim does not survive contact with the duty to mitigate. Residential tenancies work differently: in New South Wales and Victoria the amount is set by a prescribed break fee schedule or formula, not by a mitigation argument.
Not to be confused with
- Early settlement
- early settlement is paying out a loan before term, while a termination fee is what ending the contract early costs you
Frequently asked questions
Is a termination fee the same as a break fee?
Usually, yes. Break fee is the phrase used in leases and corporate transactions, early termination fee is the phrase telcos use, and cancellation fee turns up in service contracts. All of them describe a charge for ending an agreement before its agreed end date.
Can I be charged a termination fee if I give notice?
It depends on what the contract says. If it permits termination on notice with a fee attached, the provider can charge it. That does not settle whether the amount is reasonable, so check the calculation, the mitigation credit and whether statutory protections apply to your contract.
Are termination fees refundable?
Sometimes. It depends on the contract and what actually happened afterwards. If you paid an amount based on an assumed loss and the provider then mitigated it, for example a landlord re-let quickly, you may be entitled to a refund or a credit for the difference.
How do courts assess a termination fee?
They ask whether the amount is out of all proportion to the legitimate interests the clause protects, which makes it a penalty, with a genuine pre-estimate of loss at the safe end. They also look at the evidence, at mitigation, and, for consumer and small business contracts, at the unfair terms rules.
What evidence should I collect to dispute a fee?
The contract itself, invoices, all correspondence, proof of what the other side did to mitigate such as advertisements or offers, receipts for reletting or repairs, and details of any replacement income they received. Keep a dated record of every request you made and the reply.
Related terms
Early settlement
Early settlement is paying a loan or lease out in full before the end of its term using the lender's payout figure, or bringing a property settlement date forward.
Read definitionUnfair contract terms
Unfair contract terms are clauses in a standard form contract that significantly favour one party, are not reasonably necessary to protect that party, and would cause detriment.
Read definitionPayout
A payout is the total amount needed to close a loan or lease on a given date: the balance owing, accrued interest and any break costs or fees.
Read definitionFees
Fees are the explicit charges a provider applies for a financial product or service, separate from interest and covering access, administration or transactions.
Read definitionBreak option
A break option is a lease clause that lets the lessee, the lessor or both end a lease early, provided they give the required notice and meet its conditions.
Read definitionLease term
A lease term is the agreed period a lease runs, from the commencement date to expiry, which sets when rent or rentals are payable and when the lease can end.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.