Last Updated on August 30, 2022 by Neil Patel Accel
You have the right space, but do you have the right lease? The standard commercial lease terms aren’t always as standard as you might think, and whatever agreement you enter into should work for all parties, not just the landlord.
A long-term commercial lease agreement, for example, might offer the best rates, but it will lock your business into a space for five or more years and come with several provisions that limit the options for the property. A short-term commercial lease agreement, on the other hand, provides the flexibility you may seek but often comes at a higher price point and can be much more difficult to find. Landlords prefer long-haulers, after all.
All that’s to say, you want both the space and the lease to provide what you need for however long you choose to be a tenant. So what happens if the space isn’t ideal for your current situation but you’ve already entered into an agreement? You may be wondering how to break a commercial lease.
Terminating a Commercial Lease
Before making any decisions, it’s important that you fully understand the standard commercial lease terms of your contract. Some commercial lease agreements include a termination clause for certain conditions — business closure being chief among them. Such clauses can also include fees or penalties for terminating a commercial lease before it expires.
Review the terms of the lease to determine the costs associated with early termination. You may find the fees preferable to paying out the lease in full. Without an early termination clause, the lessor is within its rights to pursue legal action should you opt for breaking a commercial lease prior to the end date, and you’ll likely be on the line for all remaining payments.
Pursuing a Commercial Sublease
During your review of the standard commercial lease terms, you’ll likely find a commercial sublease clause. Some will specifically state that tenants cannot sublet any part of the premises to another entity, while others will request the lessor’s consent prior to such an arrangement. If it does allow subtenants, understand the implications of going this route.
For one, you’re ultimately responsible for returning the property in its original condition. Should a subtenant damage the premises, it’ll be up to you to pay for repairs. The same would be true for unpaid rental amounts, as the sublease of a commercial space doesn’t release you from liability for property obligations like rent.
If you are subletting only a portion of the space, other considerations must be made beyond your contract obligations. Does the space in question include separate entrances and exits? Can the parking lot accommodate the subtenant’s staff and customers? What will you do about the common areas on the premises?
Beyond that, think about what the addition of a subtenant would mean for privacy and sensitive information? Employees will no longer have the luxury of discussing certain information in the halls or kitchen — nor will the culture or character of your organization feel the same when you enter into a commercial sublease with another company.
Renegotiating Long-Term Commercial Lease Terms
As you well know, many businesses are struggling due to the pandemic, especially those looking at a long-term commercial lease. Even those with a short-term commercial lease agreement are searching for ways to ease the financial burden associated with slumps in business. Topping the list is renegotiating the standard commercial lease terms.
Much like terminating a commercial lease or subleasing a commercial space, review the terms of your contract before entering into the renegotiation process. You may just find a “force majeure” provision (which relates to unforeseeable circumstances beyond your control) that prevents you from fulfilling a short- or long-term commercial lease agreement.
If such a provision exists, you may be able to renegotiate a rent reduction. Research the market prices in your area to ensure you come to the table with an appropriate amount. Another option with force majeure would be a sublease of the commercial space if such a clause prevents you from finding a sublessor.
Final Thoughts on How to Break a Commercial Lease
Flexibility has rarely been a priority with long- or short-term commercial lease agreements. You enter into the arrangement with every intention of seeing the contract through. But the only constant in business is change, and this past year can certainly attest to that. Don’t let real estate limit your agility in the marketplace. Weigh the potential in how a space can adapt to your needs and help your business scale.
If you’d like more information, please let us know. The team at Occupier would be more than happy to schedule a demo on what our Lease Accounting and Lease Management software can do to move your business forward — even in the space you’re in.