Despite the best-laid plans, there may come a time when you need to break a commercial lease early. For example, maybe your business is expanding and you need more space. Conversely, you might be downsizing and need less square footage.
Or perhaps you need to find a location that better fits your needs. Whatever the reason, you’re wondering about how to break a lease legally. And just as important: Can a lease be terminated early without penalty?
Not surprisingly, the short answer is, “It depends.” Most commercial leases include a detailed description of the financial consequences of walking away from the lease early. Those consequences might include forfeiture of the security deposit and liability for the remaining months in the lease.
However, the language of each commercial lease may be different. You might have to dig around for a while to find what you’re looking for inside the document. However, if you use location management software to operate your portfolio, finding those relevant clauses should be easy.
Here are some factors that will help determine if you can terminate your commercial lease early. And if so, what the financial penalty might be.
Does the lease permit penalty-free early terminations? This would be a best-case scenario. Some leases allow tenants to terminate early without penalty if they provide advanced notice, such as 30 or 60 days. For example, this might apply if a tenant can no longer generate enough revenue to pay rent because they go out of business or have losses from a natural disaster.
Is there a bailout or co-tenancy clause in the lease? A bailout clause will let you terminate the lease early without penalty if your business sales don’t reach a certain level. Co-tenancy clauses let you break the lease early if an anchor tenant leaves. The latter applies mainly to retail businesses in malls and shopping centers.
Has the landlord not fulfilled key lease provisions? Tenants may be able to legally terminate a commercial lease early without penalty if the landlord has breached a substantive lease provision. Of course, the operative word here is “substantive.” Not cleaning the carpet probably wouldn’t qualify as a substantive breach, but failing to repair a leaky roof or fix a broken HVAC system might.
You should investigate your state’s commercial real estate laws and document any instances that might be considered a breach of lease provisions by your landlord. This way, you’ll be prepared should you end up having to defend your early lease termination in court.
Is the landlord open to a lease buyout? You could pay the landlord a lump sum to terminate the lease early. For example, suppose your commercial rent is $2,500 per month, and you have six months remaining on your lease. Your total financial obligation is $15,000. You might offer the landlord half of the remaining rent, or $7,500, to terminate the lease early.
Market conditions will likely play a role in whether the landlord accepts such a buyout. If it’s a hot market and the rent you’re paying is below current market rates, the landlord will probably be more open to a buyout. He can easily lease the space to another business for more money in those conditions.
Instead of terminating a lease early, you might be able to assign or sublease the commercial space to another business. With a lease assignment, you will transfer all of your lease obligations to a new tenant. With a sublease, a new tenant will move into the space and pay the rent. However, you will remain legally liable for rent payments and any potential property damage caused by the new tenant until the end of your lease term. A lease assignment would be preferable to a sublease if this is an option.
Commercial leases often include an assignment or sublease clause detailing whether they are allowed, under what conditions they’re permitted, and whether fees apply. These clauses usually give the landlord the right to approve new tenants under an assignment or sublease. A tenant broker might be able to help you find a suitable new tenant who can sublease your commercial space.
Determining how to break a commercial lease legally or how you can break your lease without penalty can be complicated. Therefore, it’s wise to consult a qualified real estate attorney for guidance in your situation.
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