Getting Out of a Commercial Lease
As a tenant, there are many reasons why you might wish to terminate a commercial lease. One unfortunately too-common reason is that your business hasn't been a success--or hasn't been as successful as you'd thought it would be. Hopefully the reason you'd need to break a lease is that your business has done so well the leased premises are too small and you need to expand to keep up with customers' demands. So is there anything you can legally do to get out of your existing lease?
Your planning should start before you ever sign the lease--you'd be wise to take to heart the old expression about an ounce of prevention being worth a pound of cure. You need to consider what you'd want to do in the event of an "early exit" and have a provision inserted that covers some possible scenarios before you sign the lease. Fortunately, there are a few different provisions you can easily negotiate with a landlord that will give you an "out" should you decide to move before a lease is up. For instance, you might want to include a clause that allows you to cancel your lease if income projections haven't reached a certain goal by the six-month or one-year anniversary of the lease.
Another possibility is to include term options, which work like this: As a new renter, you'll probably want at least a two-year initial term in order to help reduce your monthly payments. But you might be anxious about committing to a five-year term even though the longer lease period provides rent and location stability during your new business's growth years. The answer may be a one- or two-year lease with one or more options to renew, such as one or two options for an additional two years each or a single option for three additional years.
The important point is that the option be written in your favor. That means you have the right to exercise your option, and the landlord has no choice but to extend the lease term if you exercise your option per the terms of the lease. A term option will typically include a time period before the initial term expires during which the option may be exercised. For instance, the lease may provide that an option to extend the lease must be exercised at least three months before the end of the lease. If the tenant waits until there are fewer than three months left before the lease end, the option will no longer be valid.
It's common, with term options, for the landlord to ask for a small increase in the rent during the next term of the lease. The amount is usually subject to negotiation. If your business is doing well enough to extend the lease, a small rent increase shouldn't be a deal breaker for you.
Other Options to Consider
Now let's assume you want to get out of your lease before the term expires and you have no term options of which you can take advantage. One choice is to simply ask your landlord to terminate your lease. They might be willing to do so if the rental market is good and the space can be easily relet, perhaps for a higher rent. If that's the case, good for you. But that probably won't happen.
You could just walk away from the lease, but if you do that, the tenant who signed the lease (most likely you) and any guarantor would be liable for the rent for the rest of the lease or until the landlord finds a new tenant. This isn't quite as bad as it sounds because the law imposes upon landlords a duty to mitigate damages. That means your landlord can't just sit back and collect your rent but has an affirmative obligation to try to find another tenant to lease your place. If the new tenant pays the same or higher rent, you're off the hook. If the new tenant pays less rent than required by the lease, however, your landlord will claim you owe the difference over the term of the lease and you'll be forced to pay it.
But what if your landlord isn't all that motivated to find a new tenant? Since you're still liable on the lease, there's no real benefit to them to put out any extra effort to find another tenant. In that case, you'd want to try to locate a new tenant yourself to assume the lease obligations. To prepare for this situation, your lease should contain a provision that says your landlord can't unreasonably refuse to consent to a new tenant. This means that if you present a new tenant who's financially sound and experienced, your landlord can't arbitrarily refuse to sublease to the new tenant.
Another possibility is to approach your landlord about a buy-out. While it's true that if your lease still has a long time to run, a buy-out may be difficult to negotiate, if your landlord believes he'll be able to re-let your space without too much trouble, he may agree to let you out of the lease if you pay some consideration. Or you could offer to let him keep part or all of your security deposit in exchange for letting you out of your lease.
When it comes to leasing space, the smartest thing you can do is to make sure you've got your bases covered before you sign on the dotted line. That way, you've got contingency plans in place no matter how successful your business is.
For reprints and licensing questions, click here.