When breaking a commercial lease, tenants have several options for early lease termination or exiting the agreement. For many businesses, signing a long-term commercial lease provides stability and predictability. However, changing market conditions or evolving business needs can make a lease that once seemed like a perfect fit feel restrictive.
We’ll examine strategies tenants can exercise termination or exit clauses in their commercial lease before expiration, including subleasing, lease buyouts, and lease assignments. Lease Administration software provides support to your real estate team as they navigate lease termination strategies.
We’ll also look at how tenants can plan a seamless business relocation when they need to move out before a lease ends. With proper planning and negotiation, commercial tenants can exit an onerous lease obligation while minimizing financial losses and business disruptions.
Penalties for Breaking a Commercial Lease
Depending on what is written in your lease, there are a multitude of consequences for breaking your commercial lease. As a legally binding contract, it is important to enroll legal advice in advance of breaking a contract in order to avoid financial consequences, and legal action. Here are a few typical financial penalty scenarios:
- Remaining Rent Payment – The tenant is usually liable for the remaining rent due under the lease term, even after vacating the space. This is unless the space is re-leased.
- Lease Break Fee – The lease may contain a pre-set fee the tenant must pay for early termination, typically a number of months’ rent.
- Vacancy Costs – The tenant may be responsible for costs the landlord incurs while re-leasing the space like marketing, commissions, and carrying costs.
- Accelerated Rent – The remaining rent due may be accelerated so the full amount is owed immediately upon lease termination.
- Continued Rent Obligation – The tenant may be obligated to continue paying rent until the space is re-leased.
- Lease Guarantee Liability – Personal or company lease guarantees may still be enforceable.
- Legal Fees – The landlord may recoup legal costs spent enforcing lease provisions.
Depending on your lease terms, we’ll expand on some options for breaking your commercial lease.
Consider Subleasing Vacant Space
Subleasing all or part of your leased commercial space to another business is often the simplest strategies to breaking a commercial lease. The original tenant becomes the sub-landlord and finds a new tenant to take over the lease for the remainder of the term. This allows the original tenant to recoup some of its rent expenses while exiting the space. Subleasing is usually permitted as long as the landlord consents in writing. The new subtenant is subject to the original lease terms. The original tenant remains responsible for rent and lease compliance.
Before entering a commercial sublease agreement, review your current lease to understand the clauses governing sublets. Many landlords prohibit tenants from charging higher rent to a sub-tenant. You will need to negotiate sublease terms acceptable to the landlord and new sub-tenant. Also analyze the remaining lease term and current market rates to set appropriate sublease rent. You may lose money if current rates are lower than when you signed your lease.
Advertise the sublease space widely on commercial rental listing sites. Be prepared to show the space and vet prospective tenants thoroughly. Run credit checks and verify business references to avoid problem subtenants. Also consult an attorney to draft a strong sublease agreement spelling out responsibilities clearly. With proper execution, subleasing allows tenants to exit a substantial portion of space smoothly.
Negotiate a Lease Buyout Agreement
When a tenant needs to exit their entire space, another option is negotiating a lease buyout with the landlord. This involves paying the landlord a lump sum payment to terminate the lease early. The buyout amount is a matter of negotiation between tenant and landlord. Typical buyout amounts range from a few months’ rent to the rent due for the entire remaining lease term. Landlords have no obligation to accept a buyout offer, but many are willing to negotiate for a reasonable sum that lets them re-lease the recovered space.
Lease buyouts allow tenants to exit quickly, which benefits the landlord. Tenants can depart without ongoing rent obligations. Buyout terms may also include forfeiture of the tenant’s security deposit. Consult your lease to see if a buyout clause already exists before making an offer. Be prepared to start high with the amount you propose to pay. Hire a commercial real estate attorney to negotiate and draft the buyout agreement. This strategy absolves the tenant of future lease liabilities through a one-time payment.
Assign the Lease to a New Tenant
Another strategy to breaking a commercial lease is via assignment transfers to a new tenant – this assigns the rights and remaining lease term to another business. It differs from subleasing in that the new tenant deals directly with the landlord. The original tenant transfers all interests and obligations under the lease to the assignee. Landlord consent is usually required for a valid assignment. State laws may also constrain lease assignments.
Assigning a commercial lease can be complex, so consult a lawyer to review lease terms and ensure compliance. The original tenant may still be on the hook for rent if the assignee defaults. To limit liability, seek a release of all future obligations from the landlord. Also conduct due diligence on the assignee’s financial health to avoid default.
Some leases prohibit transferring to another business in the same industry or restrict assignments altogether. Check your lease terms before pursuing this exit method. With proper execution, lease assignment provides a clean break for the vacating tenant. The landlord also benefits from keeping the space occupied.
Plan a Strategic Business Relocation
Sometimes breaking a commercial lease results from a business simply needing more space or desiring a new location — whether its office space or retail shopping center space. In this case, the tenant should develop a strategic plan for relocating before the existing lease expires. Moving creates costs and business disruptions, so careful planning minimizes the impact.
Start planning your relocation up to a year in advance. Search for suitable new space and determine build-out costs for any needed reconfigurations. Create a moving budget including expenses such as moving services, utility transfers, printing new signage and materials, and addressing change notifications. Develop a detailed timeline for the move and assign tasks to staff.
To avoid paying rent at two locations, try to time the new lease to commence when the old one terminates. If gaps occur, build the added cost into the moving budget. Also budget for any period when the business must shut down during the transition. Look for ways to phase the move to avoid closing entirely.
Inform customers of the impending move and coordinate handling of services like mail and deliveries. Use the relocation as a marketing opportunity, such as with a grand reopening event. With enough lead time and planning, commercial tenants can execute a seamless exit and relocation.
Exit Strategies Offer Flexibility
When businesses are thinking about breaking a commercial lease, tenants do have options. Various considerations like subleasing, buyouts, assignment, or strategic relocation give the tenant options. Each path involves costs and risks that tenants should carefully weigh. But with forethought and negotiation, commercial tenants can regain control over their space obligations. Be sure to employ a real estate attorney who is well versed in general corporate matter to advise your termination and provide your landlord with written notice. The exit process also creates opportunities to right-size space needs, relocate to a better market, or refresh brand image. By planning lease exits strategically, businesses can adapt and evolve.
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