Breaking a can be expensive for your business. Nevertheless, the consequences of remaining in a bad commercial lease agreement might be even worse. Your company's lease might be disadvantageous for many reasons.
For example, your lease might have been drafted to favor your landlord, or local economic conditions might have deteriorated since you signed it. No matter why you need to break your lease, it will be to your advantage to hire a lawyer who can make the process as painless as possible.
When Do You Need to Break a Commercial Lease?
There are many reasons why your company might need to break a commercial lease, including the following ordinary circumstances:
- Your company has outgrown its leased space. This is the “good problem” that thriving businesses often run into.
- Your company has downsized, and the leased premises are too big. This results in an already-struggling business paying for unused space.
- You found another place in a better neighborhood. The new area might be closer to your customers, it might reduce employee commute time, or it might be more suitable for your business for other reasons.
- You have a deadbeat landlord. This is a problem, but it might also give you legal grounds to escape a lease that you were looking to exit anyway.
There are many other reasons why it might be in your company's best interests to break a lease, even if costs are involved.
Grounds for Legally Breaking a Commercial Lease
If you decide that your company must get out of the lease, the ideal situation is finding legal grounds. Such grounds might include the following:
- Your lease has a termination clause that allows you an early exit on terms that don't cost a lot of money.
- The leased premises are in high demand, and your landlord can easily replace you and charge the next tenant more than they are charging you.
- Your landlord committed a “material breach” (a serious violation) of your lease. This will give you the legal right to abandon your lease agreement.
- A bankruptcy court has accepted your Chapter 7 bankruptcy petition and issued an “automatic stay”.
- Your lease allows you to assign it or to sublet the property.
Your lawyer might come up with additional legal grounds to terminate your lease.
Situations When a Landlord Might Refuse to Renew a Commercial Lease Agreement
Your landlord might refuse to renew your lease agreement even if it has an automatic renewal clause. Some of the grounds for a refusal to renew a lease include:
- You failed to pay the rent on time;
- You failed to maintain the property as required by the lease agreement; or
- Other violations of the lease terms, including reasonable expectations not explicitly included in the lease agreement (damage to the property, for example).
If your lease does not include an automatic renewal clause, the lease renewal is at your landlord's discretion. Some of the reasons why your landlord might choose not to renew your lease include:
- The landlord can rent the exact property to someone else on terms that are more favorable to the landlord than your current lease agreement.
- The landlord wants to sell the entire building that contains your leased premises.
- The landlord wants to tear down the building that has your leased premises.
- The landlord is insolvent or bankrupt and must surrender the property to creditors.
Any of these reasons could work in your favor if you wanted out of the lease agreement anyway.
What Can Happen When You Break a Lease?
Are you wondering, "What is the penalty for breaking a commercial lease?" It is important to know that contract law, landlord-tenant law, and other laws impose financial consequences upon breaking your lease. The terms of the lease also impose consequences; however, contract law imposes strict limitations on how severely a landlord can “punish” a party who breaks it, no matter what the lease says.
The general principle is that if you break a lease, you are obligated to pay the landlord an amount sufficient to put them in just as advantageous a position as they would have been if you had not broken it. Although a court may assess damages against you, it is unlikely to order your business to do anything else (such as remain on the premises).
Keep in mind that the laws and rules controlling how to break a commercial lease legally vary significantly from state to state — and even from city to city. It is essential to understand the location-specific laws governing how to get out of an office lease before making any moves that have high-stakes legal consequences.
Costs of Breaking a Commercial Lease
Knowing how to break a commercial lease can help you avoid paying damages. Paying damages for breaking a commercial lease might mean compensating the landlord for the landlord's costs and other damages incurred as a consequence of your breach, including:
- Advertising costs incurred to secure a replacement tenant.
- A termination fee specified in the lease agreement, plus any other costs specified in the lease.
- Clean-up costs, if you abandon the premises without cleaning up.
- And legal costs (under certain circumstances), if your landlord has to take you to court.
You may also have to pay some of all of the rent that you would have paid if you had not broken the lease. Remember that in Colorado, a landlord can take action to perfect a security interest in your fixtures, equipment, etc., to guarantee your payments under the lease. This security interest does not attach automatically, however.
Ways to Reduce the Costs of Breaking a Commercial Lease
There are several ways to minimize the costs of breaking a commercial lease. Some of these ways of how to get out of an office lease might not apply to you due to circumstances beyond your control, such as economic conditions. The better the economic conditions that prevail when you seek to break your lease, the less money you are likely to end up owing your landlord.
Your landlord must make reasonable efforts to mitigate their losses by, for example, renting your property to another (suitable) tenant during the remainder of your lease term and by deducting the new tenant's rental payments from the amount that you owe for breaking the lease. Additionally, be sure to explore the following options.
Many commercial lease contracts forbid the tenant from subleasing the property to a third party without the landlord's consent. Of course, your landlord might gladly offer this consent if you were to help them find a suitable replacement tenement–or a tenant who would pay even more than you are paying.
On the other hand, if your lease agreement does permit subleasing, you can use this method to reduce or eliminate the costs of breaking the lease by using the sublessee's rental payments to offset your rental payments to your landlord. The lease term that permits subleasing might include conditions you must meet before subletting the property.
Commercial Lease Buyout
Another way to reduce your cost is to buy out your remaining lease term. This means offering to pay your landlord a lump sum in exchange for the periodic rental payments that you would otherwise pay under the lease. Since you would be paying the landlord early, you could seek a discount on the total amount. Such an offer could be particularly attractive if you have years remaining on your lease (and therefore, your landlord has years to find another tenant).
Regardless of your situation, the best time to learn how to break a commercial lease agreement is when doing so is substantially more financially advantageous than remaining in the lease. In other words, you do not want to be in a worse financial situation after the buyout than before.
The optimal way to proceed with a commercial lease buyout is by consulting an attorney, who will help you understand the contract ramifications and structure the deal in a way that safeguards your interests.
Negotiating a Termination or Exit Clause
A termination or exit clause can be an answer to how to get out of a commercial lease early. Your landlord might be friendly to the idea of negotiating the terms of ending your lease early. Of course, it is best to negotiate such terms before you sign the lease. However, it is also possible to arrange an amendment of the lease after you have already signed it.
How much your landlord is willing to compromise depends on economic conditions and how much leverage you bring to the negotiating table. For example, if your landlord has violated their end of the agreement, you could use this as powerful leverage to negotiate a favorable exit clause. Research state law as well as the terms of the lease to evaluate your landlord's compliance with their own lease obligations.
Filing bankruptcy is a business decision that relieves your company of its obligations under the lease, including the payment obligations for past and future rent.
There is a caveat with bankruptcies, however: While the bankruptcy may help your financial situation, it will also lead to a black mark on your company's credit history. Additionally, the guarantor of the lease, if there is one, will still be held responsible for your company's lease obligations.
Have a Substantial Breach on the Landlord's Part
Every landlord has duties under the provisions of the leases they hold. Some of these provisions are material, and breaching them could allow a tenant to legally walk away from the lease.
The key word here is "material". The breach must be more serious than failing to have the windows washed for one week. Some examples of material violations include a burst pipe that floods the property for weeks or a broken furnace that is not fixed during the winter.
Offer a Lump-Sum Payment
How much does it cost to break a commercial lease? You should try to avoid breaking it. Instead, offer the landlord a lump-sum payout. For instance, with 18 months left on a $2,000 monthly lease, consider offering 50% of the remaining payments or another discount to close out the lease.
Whichever course of action you might be contemplating, contacting a commercial law lawyer is essential to ensure that you choose the most advantageous course for your business.
Reasons Why a Landlord Might Evict a Commercial Tenant
One way to exit a commercial lease, for example, is for the landlord to evict you. This is not the ideal option, because it can be very expensive. Colorado law includes fairly quick procedures for evicting a commercial tenant. Your landlord can evict you if you commit a serious violation of your lease.
Colorado's Forcible Entry and Detainer statutes provide the following eviction procedures:
- The landlord issues you a written notice describing your default. The notice must give you three days to cure the default or vacate the property.
- If you fail to comply within three days, the landlord can file a complaint and schedule a court hearing.
- You can defend yourself at your court hearing.
- If you lose or fail to show up, the sheriff can remove your property and bar you from the premises.
Beware! In Colorado, the landlord has no duty to preserve the tenant's property that they remove from the premises.
This post outlined only a few of the ways that might allow you to terminate a commercial lease. A lot depends, however, on your individual circumstances. Our lawyers enjoy the benefit of experience with some of the biggest names in commercial law. Despite this, we are a small firm that will treat you like a person, not a file number. Contact us.
Tips for Avoiding Breaking a Commercial Lease
Getting out of a commercial lease can be a viable option in some cases. However, avoiding a lease break altogether will save you time and prevent headaches. Taking some or all of the following steps can help you avoid this situation:
- Flexible office spaces: Consider flexible office spaces for your company, which will keep you from being locked into traditional term lengths, design, and spacing limitations.
- No long leases during growth periods: Avoid a long-term lease, especially if your company is growing. Doing so allows you to make location changes without having to wait out a bad lease decision or walk away from one.
- License a part of your office: Check out PivotDesk as an alternative to canceling your lease. It allows businesses to sublet excess office space. You might think of it as the Airbnb of office spaces.
- Know your lease: A thorough read-through of your lease with your business plan in mind will give you an idea of the costs and repercussions of breaking your lease, such as the loss of your security deposit.
How to Get Out of a Commercial Lease: the Takeaway
Breaking a commercial lease is the same as breaking a contract. There will likely be penalties and consequences.
In some cases, a company may have grounds to break a lease without suffering legal liability. And in other instances, it may be financially beneficial to break the lease, regardless of the penalties. Whatever the context, breaking a commercial lease should be done only under the guidance of an experienced real estate lawyer.
Contact us for more information about the services we provide.