Signing a lease for your company is exciting, but after the initial thrill dies down and some time passes, it is possible that you may find yourself looking for an exit plan for a number of reasons. Most commonly, a commercial tenant only wants out of a lease in two situations: (a) the tenant’s business is not going well, and the tenant is having difficulty affording the leased premises; or (b) the tenant’s business is flourishing and needs more space or a different type of space.
Before the fact.
As with many things in the business world, these issues are easiest to deal with if they are considered in advance. Ideally, a commercial tenant will think through all possible scenarios and make sure they are comfortable with all applicable provisions before entering into a contractual agreement. The following are some points to consider before you sign. If you negotiate carefully on these points, you will be in good shape if you decide to break your commercial lease early:
(A) Include an escape clause/right to terminate (and end liability under the lease) after a certain amount of time, or maybe anytime, for a termination payment or if the business fails to achieve a certain level of success. (Example: Restaurant and bar lease: Two years < $800,000 gross revenue.) Also consider a tenant’s right to terminate if property taxes increase more than a certain percentage.
(B) Include broad rights to sublet and/or assign the lease.
(C) Resist usage restrictions for the leased premises.
(D) Resist including tenant covenants “not to vacate” and for “continuous operations.”
(E) Use a separate entity (LLC) with no assets but the leasehold estate to be the tenant.
(F) Resist giving personal guarantees.
After the fact.
In reality, lease terms often remain ignored altogether until the need to move out arises. At that point, many tenants will find themselves looking at the terms of their commercial leases for the very first time. If the lease does not include any escape clauses, you will need to consider practical options outside the lease document itself. Sometimes a perceived disadvantage, such as the lease language itself, can actually be an advantage in the right situation. Savvy tenants will find ways to leverage a seemingly bad lease to their benefit.
Here are some practical tips to help you negotiate yourself out of that lease in spite of unfavorable legal language:
(A) Offer up a replacement tenant. Regardless of the terms of the lease, find a new tenant to sublet a portion of the leased premises or find a replacement tenant. In the current market, tenants are relatively easy to come by. And sometimes the franchisees of national business will step in to support the tenant. Once there’s a new tenant lined up who may even want the space longer than your current lease, your landlord is much more likely to let you out of a lease.
(B) Be a squeaky wheel. Work the lease terms to demand every single repair or capital improvement/replacement possible to be at the landlord’s expense. As a general rule, landlords hate spending money on tenants. Being a high-maintenance tenant may make it more likely for the landlord let you go under better terms than provided for in the lease.
(C) Play up the practicalities. Carefully explain to the landlord that something is better than nothing. Landlords don’t generally like having to sue tenants, especially in situations where the tenant is a failing business. Experienced landlords know that such tenants are usually not solvent and not worth pursuing; at best, the landlord ends up as one of several creditors in a bankruptcy case. As an alternative to this arduous experience, the landlord may be willing accept a small lump sum to terminate the lease and waive tenant’s liability.
The long and the short of it is that the best way to get out of a commercial lease is to incorporate good exit language up front. However, if that time has come and gone, you’re not completely out of luck. By obtaining a stellar replacement tenant, being an annoying tenant and strategically negotiating with your landlord, you may still liberate your business from an unwanted commercial lease. D
Sara Sharp is an attorney at Sparkman +Foote LLP. She can be reached at firstname.lastname@example.org.
John Koechel is senior counsel with Sparkman + Foote LLP, where he focuses his practice on real estate and related business matters. He is licensed to practice law in Colorado and Texas and can be reached at email@example.com.