Whatever the reason is, your current commercial space is not working for you.
It is time to see what your options are.
Getting out of a lease can seem like an impossible task. Well, it is because this is the exact situation your landlord was trying to avoid. Usually, corporate leasing agreements are air-tight and do not provide the leeway needed for you to get out.
Don’t worry. While it won’t be so simple for you to cut and run, there are avenues you can take to potentially end your lease. As tenant reps, we know how difficult a situation it is for corporate professionals when their space doesn’t fit their needs.
While it is not always the right decision to terminate your lease, we have seen what steps you can take to do right. We have integrated our expertise within this list, so you know the dos and don’t’s of this process including:
2. You’re still on the hook for most of the cost
4.Come prepared with a good representative
1. Do Your Research
Conducting market research is a vital first step towards knowing the position you’re in to introduce negotiations.
Landlords are usually unwilling to break leases because your tenancy is their guaranteed income. As you can imagine, they will probably not be too happy if their monthly cash flow is threatened. Most likely, the only reason they may be willing to break your lease is if they think they could stand to profit more if you are out of their space.
By this reasoning, there are certain factors that will make them more likely to concede to a termination. The two most common situations include: =
- You are in an area of high demand for commercial properties
- Your rent is below the market value of neighboring properties
These circumstances are highly related. It comes down to supply and demand. If the demand for commercial real estate exceeds the supply, landlords can drive up rent prices. If you are paying low rental rates in an area of high demand your landlord probably won’t be too sad to see you go.
Market Demand Fluctuates
This commonly occurs when the tenant establishes leasing terms in a period of low real estate demand. For instance, with the work from home revolution, not many tenants are looking to sign leases. Therefore, if you do, landlords are more likely to bend over backward to get you in their space. This means better terms and potentially lower rent for you.
Let’s say though, in a few years you are still in that space. However, everyone has gone back to work and the demand for commercial real estate has skyrocketed. You will still be paying the low rates you locked in when the demand was low. If you want out, your landlord may be more willing to terminate the lease because on top of the lump sum termination payment, there are plenty of other viable tenants willing to pay higher rates for your space.
If you’re in a popular area, the landlord also knows that there will be a quicker turnover in having a tenant in their space. It is an extensive process to market, fine-tune, and negotiate terms for a commercial lease.
It could take months before a new tenant is settled within the property and paying rent. The likelihood of a drawn-out process is lower in an area where tenants are competing for space. Therefore, if your landlord thinks they can get someone new in quickly, they may be more open to letting you out.
Knowing the market you’re in will inform you of the leverage you have when negotiating a termination. Landlords are traditionally unwilling to end leases, but if you know your area and come prepared, it could make the difference.
2. Understand That You’re Still on the Hook for Most Costs
Don’t expect to get off scot-free, even if you are in a popular area. Your commercial lease is a binding financial and legal agreement. You agreed to pay the net cost, but sometimes landlords will take a lump sum payment instead of rental installments over the rest of your lease’s term.
The exact amount will depend on arbitration with your landlord and they have no obligation to negotiate. But, it may be beneficial for them to concede to such an agreement. Landlords might be willing to accept a lump sum of cash now versus receiving the money over the rest of your lease’s term. Sometimes, they will allow you out of your lease if you pay the remaining net present value of it.
For instance, if you want to leave seven years into a ten-year lease and agree to pay out the rest of the costs, they can profit. If it would cost you one million dollars to remain in your space for the next three years, you front that amount rather than staying and paying it over the next 36 months. It may financially benefit the landlord to take 75 percent in a lump sum, have as little time as possible on the market, and get a new tenant in for more guaranteed cash flow.
Landlords may be willing to agree because vacant space is expensive. Letting you out of your lease is a big risk for them because they don’t know when their next source of income will be available. However, if you pay the remaining funds of your lease upfront, they have a guaranteed window of time to find the next tenant without losing money.
They do not take on the expenses associated with vacant space and can even move a new tenant in before the original expiration of your lease. Thus, they may even earn a profit.
3. Know Your Options
Most likely, referring to your lease will be the most reliable source of insight into your right to terminate. Certain clauses will specify possible actions you can take in the event you want to vacate your space early. Know that these terms are not in every lease.
Therefore, if they aren’t in your original agreement, they aren’t at your disposal. They are often rare to see in action, but good to know about. So, if these clauses are not within your existing lease, consider negotiating for them in the next.
Buyout Clause
With this term, you have the ability to buy out the existing rent of your building before the expiration date. It functions similarly to the aforementioned lump-sum payment. The exact circumstances are negotiated prior to the rent commencement date. During negotiations with your landlord, a buyout amount and timeline will be specified in your original lease. If this term is not specified in the initial agreement, it cannot be employed.
Surrendering Your Space
Surrendering a space typically occurs when the costs from one lease are transferred to another property owned by the same landlord. For example, if you are in a multi-tenant building, you may find that you need more space. Instead of moving out, you may have the option to surrender your two smaller suites for one larger suite.
Essentially you will surrender your current space, its term will end, and you may need to enter renegotiations to introduce an amendment to the lease. Within the amendment will be information like the defined space, its terms, date when it becomes effective, etc. As such you may be on the hook for additional fees or elevated rents depending on the size difference between the old and new spaces.
As with all of these clauses, your landlord’s willingness to cooperate will highly vary and is largely dependent on existing negotiations.
Assigning Your Lease
This clause can take place if there is another tenant willing to take on your lease. You will transfer the costs, responsibility, and space to a third party for the entirety of the remaining lease. In most cases, the landlord’s consent is a necessary precursor to assigning a lease.
Sublease Your Space
In this case, you vacate your space for a new tenant, but you assume the responsibility associated with their tenancy. Subleasing your space will allow you to avoid paying the full amount for a leased property you don’t want. However, most leases specify that you cannot profit from subleasing the space.
This term would also have to be laid out for you to eventually begin subleasing. Regardless, if it is there, it is a smart move to mitigate the cost of your original lease.
Force Majeure
A force majeure clause gives tenants the right to vacate their space due to circumstances surrounding an unforeseen severe event or emergency. Rarely seen in action, it attempts to cover anything under the definition of an unpredictable “Act of God.” This could mean anything from natural disasters to labor disputes, or worldwide pandemics that halt business… Sound Familiar?
Many businesses used this clause to try and get out of their leases during COVID-19. However, it is often complicated to enact this clause and it would have to be laid out within the terms of the original lease.
4. Come Prepared With Representation
The key way to find success during a potential termination is by working with other professionals. Real estate experts understand that getting out of a lease is a complicated endeavor. They know how it can be achieved, albeit rarely, and other options you have should it fail. Working with a tenant representative will ensure that your rights as a tenant are being properly enforced.
Tenant reps are professionals who solely protect the interests of tenants. This critical factor will level the playing field against landlords who work behind their brokers and legal counsel. Going into negotiations without a rep of your own or your own legal team can seriously damage your potential to get what you want. Whether this means terminating a lease or just entering renegotiations, having support can make the difference. Tenant reps will work with you to determine the right decision, no matter what it may be.
Negotiating a Termination Can Be Tricky
All said and done, negotiating a termination is a complicated process. However, if you don’t complete all the necessary due diligence, you can find yourself in a lot of trouble. Your landlord is not under any obligation to let you out of your lease. If they are unwilling to negotiate, you do have other options depending on what’s laid out in your original lease.
However, you must keep in mind that there is a wrong way to get out of a lease. If you vacate the space or stop making payments without your landlord’s consent, you will face legal and financial ramifications. Breaking a commercial lease is a serious offense, so make sure you know how to do it right.
Tenant reps will inform you of the rights you have during this process so you can avoid any negative consequences.
