There are a number of reasons why a business owner might be motivated to end a commercial lease early. The most common reason is that a business is not doing well enough to keep up with the lease payments. Other reasons include changes in the local market, the need for larger or smaller space, or the simple desire to move on to other endeavors. Whatever the circumstances, a tenant desirous of terminating its commercial lease early faces an uphill battle. Commercial landlords count on tenants to maintain their lease obligations. They enter into long term leases to avoid the costs associated with continually looking for new qualified tenants and more importantly to avoid the loss of revenue associated with empty space. For this reason, landlords typically demand strong lease language discouraging tenants from early termination. See “Assignment Clauses and Related Terms in Commercial Leasing”.
Once a tenant decides, for whatever reason, that it wants to terminate a lease early, it should proceed cautiously. The best approach of course is to seek the assistance of an experienced San Diego commercial lease lawyer. Whether or not you consult with an attorney, it’s important to review your lease terms carefully so that you have a clear understanding of the options available to you and/or the consequences of early termination. What are the necessary steps for assignment of the lease to a new tenant? Does the lease give the landlord unfettered discretion in deciding whether to accept an assignee (a new tenant)? How does the lease define damages for early termination? Is there a recapture clause (a clause that allows the landlord to terminate the lease merely because the tenant asks the landlord to approve an assignment). Of course, tenants may also seek other ways to avoid early termination such as proposing flexible payment options to catch up on rent, proposing temporary reduced rent, asking to be moved to a smaller space on the same property or seeking assignment approval. It is of course best if you can successfully avoid early termination via one of these proposals. However, they are easier talked about than accomplished.
In most cases, a tenant terminating a lease early is liable for any unpaid rent and the unpaid rent due for the balance of the lease term less mitigation. Mitigation is the amount a tenant can prove could have been reasonably avoided had the landlord made an effort to re-lease the space. From a practical standpoint, tenants without the resources necessary to hire an attorney and litigate the case most often find themselves facing default judgments for the full amount of the damages requested without any mitigation. This is why ignoring the problem isn’t an option. At the same time litigation is extremely expensive. However, landlords are sometimes willing to informally discuss early termination terms that factor in mitigation so long as tenants are communicating an intent to find a fair resolution. A fair resolution unfortunately does not mean that the tenant is going to like the outcome. Objectively, fairness would require a tenant to be responsible for the actual costs associated with the landlords quest for a new tenant (past due rents owed including common area maintenance expenses (“CAMS”), all rents and CAMS to the date of a final agreement, all costs associated with finding a new tenant, the costs of rent and CAMS while the space is empty and if the new tenant pays less rent, the difference the landlord would have earned had it received the higher rent. These costs can be considerable. Moreover, landlords don’t always know how long it will take and they err on the side of benefiting themselves when negotiating early termination terms.