How Commercial Tenants Can Get An Early Termination Of Lease
Recently a company I was working with came to me with a question. Could they find a way to negotiate an early termination of their lease agreement? There are a few ways to accomplish this, and we’ll discuss them below. You can also check out my free guide here for commercial tenants looking to save thousands on their next lease.
Lease Term Is Key
The lease term can be a challenging topic to cover with commercial tenants. Companies often feel the need for flexibility in their growth models, and getting locked into a 5 year lease feels like the opposite of flexible. Sometimes signing a longer term lease is unavoidable. Other times it can be the right financial decision to make. Much of that depends on the current market conditions, the amount of improvements needed in the space, and other similar considerations.
So what can a tenant do if they have some time remaining and would like to explore an early termination of the lease?
The “Why” Matters
We need to answer a couple questions in order to determine the best way to handle an early termination of lease. First: why do you need to terminate the lease? The reasons for needing a termination or adjustment of the lease obligation are important. Some reasons why this might be necessary include:
1. Financial hardship of the firm due to market conditions, loss of a critical project, death of a key person/partner/owner
2. Unexpected growth needs due to improved market conditions, a higher volume of work due to new projects and/or clients, etc
3. Change in workplace strategy, for instance, allowing employees to telecommute or work remotely, or vice versa.
So what are your options for early termination of the lease when the unexpected happens?
Talk To The Landlord
The first action should be to discuss the situation with the landlord. Many factors can affect how a building owner will react to this discussion, but it is vital to start here. The landlord may consider marketing the space to outside tenants if the firm no longer needs some or all of its leased space. If a suitable tenant can be found to replace you the landlord may be willing to release your company from its remaining obligations under the lease.
If you wish to reduce your space but keep some to operate the business, some landlords will consider making this adjustment. It is possible you will need to extend the remaining lease term on the space you keep in exchange for giving back a portion.
If the landlord has more than one commercial property in the area it may be possible to switch your lease to a smaller suite. This avoids some of the rent expense, and is an easier change for the landlord to make because he retains you as a tenant.
Alternatively, if your firm needs more space to accommodate growth, the landlord will be very interested in making it work. If there is vacant space contiguous to your current suite this will probably make the most sense. Be careful to negotiate the expansion space as you would any other lease. The landlord should be providing a tenant improvement allowance, free rent, and a competitive rental rate.
If the landlord cannot provide available space contiguous to your existing suite, he may consider relocating other tenants or offering a larger space somewhere else in the building.
Subleasing Your Space
As discussed in my article about subleasing, it is often a possibility to lease the space to another tenant. Most commercial leases contain a Subleasing & Assignment clause which grants tenants the right to lease their space to another company. All potential subleases would need to be approved by the building owner. If the building owner does not believe the sub-tenant has strong enough credit, or their type of business does not fit the building, the owner may not consent.
Subleasing of your space can be a viable option, but the timeline involved will be greatly impacted by the current market conditions. In a slow market with lots of vacancy, it can take months to find a suitable sub-tenant. The sublease rate may need to be lower then what you are currently paying the landlord as well in a soft market. Conversely if the market is strong and vacancy is low, you may lease the space quickly and for a profit.
License Unused Space
Licensing of space is similar to subleasing, though it is typically for a shorter period of time, and for smaller blocks of space. A tenant could consider licensing a few spare offices or work areas to small businesses or start-ups. These types of firms often need a short term and flexible arrangement. It is important to check the terms of your lease agreement to determine if you have the right to license space. If so, it may not require landlord’s consent, or a formalized sublease agreement. A license agreement could potentially be a short one page document allowing temporary access to space.
Negotiate A Buyout
When all else fails, it may be worthwhile to consider negotiating a buyout of the lease. The buyout will typically be a percentage of what the tenant owes in rent. Unfortunately tenants in financial crisis may not have the cash available to make sure a payment. Perhaps the landlord would consider a payment plan instead of a lump sum. Another option for tenants that want to relocate, is to negotiate their new landlord to pay for the buyout of their existing one. This can work in softer leasing markets where the incentive packages can be higher. The new landlord would cut a check to the tenant as a condition for signing a lease, and the tenant would use those funds to pay the buyout of their old space.
The Best Solution Is Planning Ahead
The best way to avoid this situation is to plan ahead and negotiate accordingly. Tenants should consider their potential future needs and work to give themselves options. Those options can be written into the lease, or they could involve insurance policies to cover unexpected business issues and interruptions.
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