In commercial real estate, there may come a time as a commercial tenant or commercial landlord you'll want to break the commercial lease. Breaking a commercial lease isn't ideal for either party, but it can be a necessary business decision in certain scenarios. Since a commercial lease agreement is a contractual obligation, both parties should understand the consequences, costs, and options for an early termination before entering into a commercial lease. However, if that contract needs to end, learn what the process of breaking a commercial lease is, possible consequences for the breaking party, and ways to create the best possible outcome for everyone in this step-by-step guide.
1. Make sure breaking the lease is worth it
There are several reasons a business owner or landlord may want a lease termination. Some of these include too-high or low rent in the current market; needing to downsize or move into a larger space; closing the business; disputes between the landlord, tenant, or other neighboring tenants; or an inability to maintain the rent or lease terms for the remainder of the lease.
A commercial lease termination is a serious business decision that should be considered carefully. Tenants may be obligated to pay steep fines, and landlords may be faced with a slower rental market, lower rent, or high vacancy rate as they try to find a replacement tenant. Taking appropriate action to end the commercial real estate lease on the best possible terms can save everyone time, energy, and money.
2. Refer to your contract
In most cases, the legal obligations are clearly defined in the lease contract, which can vary depending on the type of lease or commercial space being rented. Keep in mind that even if a breach of contract has occurred, there are almost always additional terms stating that the offending party has a specified length of time to remedy the situation before termination or legal action is allowable.
If the issue extends beyond the language defined in your lease, early termination may be the next-best course of action. Start by referring to your lease's early termination clause or break clause. This clause should state either party's right to break the commercial lease before the lease term is over, the costs associated with breaking the lease, and the process to initiate this. Depending on the commercial lease was written, the tenant may forfeit their security deposit upon early termination.
Make sure you're in current good standing of the commercial lease obligations and not in breach of contract. If there is a force majeure clause, which means circumstances beyond either parties' control have impacted the ability to uphold the lease obligations, consult an attorney to see if it applies. There may be an option to sublease the unit rather than break your lease altogether, in which case you as the tenant are responsible for finding a replacement tenant with approval from the landlord.
3. Approach the landlord or tenant
It is essential that you follow the process outlined in your contract when you decide to approach the other party about early termination. Not doing so can put you in breach of contract and at a significant disadvantage when starting negotiations. If you don't thoroughly understand what needs to occur, you might want to consult with an attorney before initiating a conversation with the landlord or tenant. Both parties can be negatively affected by an early lease termination, so it's crucial you understand your rights and obligations. Negotiation is always an option and may provide the best outcome for both parties.
4. Negotiate agreeable terms
If a tenant needs to terminate a lease, any number of options may make this possible. Consider what will work best for the other party while still obtaining your desired outcome. It may be a surrender of lease, where both parties agree to terminate early, or it could mean assignment of the lease to a new party. Keep in mind that some of these scenarios may create the desired outcome in the short term but still keep you on the hook should the new tenant fail to uphold the lease obligations.
Once an agreement is made, both the tenant and landlord should sign an amendment waiving the lease provisions or mutual lease termination agreement, which outlines the exact terms of the early termination. It's a good idea to have this drafted by an attorney to make sure it would stand in a court of law. In serious cases when you can't reach an agreement, you may need to involve an attorney to settle or take the case to court.
The Millionacres bottom line
It's imperative that no matter what the situation is, you follow the legally binding process for early eviction. It's never a good idea to simply vacate the premises. Failure to do so can result in significant business and even personal ramifications.
Breaking a commercial lease can be an expensive, lengthy process if the appropriate steps aren't followed. By going through this process and being prepared, you can navigate this situation with as much ease as possible so both parties are able to reach an agreement with minimal negative impacts.