When you sign a lease for a commercial property, you enter into a legal agreement that comes with preset financial obligations. Simply put, you are responsible for paying the agreed-upon rent every month throughout the term of the lease. Unfortunately, in the business world things don’t always work out as planned and, on occasion, companies find themselves in a situation where they need to exit their lease. While there’s always going to be a cost associated with breaking a commercial lease agreement, there are a few scenarios that would allow you to walk away from the contract with lesser repercussions.
In order to take advantage of either of the first two options below, you need to have the foresight to negotiate the inclusion of these clauses in your lease. While both clauses are pretty standard for commercial real estate leases, you can work on negotiating the terms in order to make them more favorable to you as the tenant.
Early Termination Clause
As the name implies, an early termination clause allows the tenant to end the lease agreement ahead of the original lease expiration date. You’re not home-free, however. Early termination clauses usually kick in after the second or third year of a lease.
Additionally, you will most likely be required to provide a written notice up to 6 months in advance and pay an early termination penalty equal to several months of rent or more.
Arguably the best-case scenario for those looking to get out of a lease early is having a sublease option in your lease. It allows you to find a substitute tenant to take over your lease and rent payments. Keep in mind that even if you sublease your space successfully, you are still the legally liable party under the original lease agreement. Also, sublease rental rates tend to be lower than market rates so you will have to cover the difference between what the subtenant pays you and what you owe the landlord.
If these provisions were not negotiated in the original lease, you still have a few opportunities to walk away from the lease; however, they may not necessarily be within your control.
Similar to an early termination clause, a buyout would let you walk away from the lease for a fee. The big difference, however, is that early termination penalties are negotiated at the time of lease signing, whereas the buyout penalty would have to be negotiated at the time of the buyout request. While your negotiation skills can certainly make a difference, you are largely at the mercy of the landlord and, by extension, the current market conditions. If the market is weak, the landlord would anticipate difficulties finding a new tenant, therefore, will be asking for a larger buyout payment.
If your company has filed for bankruptcy, the law allows you to walk away from your commercial lease without having to pay any remaining due rent or termination fees. That, however, may affect your creditworthiness when you start looking for another space in the future. Also, if the lease has a guarantor, that party will still be responsible for any of the tenant’s remaining financial obligations.
While technically it can offer a way out of your lease, a landlord default scenario is largely out of your control. Nevertheless, if the landlord does default on any of their responsibilities under the lease, you may be able to terminate the lease as a legal remedy.
The one common thread in all of the above scenarios is that you will need the cooperation of the landlord. Therefore, it is important to maintain a good business relationship with them throughout the lease term and be forthcoming and open to discussions if you find yourself in need to terminate your lease.
The best thing you can do to protect your interests is to hire a tenant rep broker, who can not only represent you during the original lease negotiations but can also help you walk away from the lease with minimal consequences. Contact our experienced tenant representatives today if you are looking for a new lease or an exit option from an existing one.