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.
Once a tenant has a clear understanding of its options under the lease, it can consider whether seeking landlord approval of an assignment is feasible. Selling the business or finding a replacement tenant requires landlord approval so the assignment language in the lease is critical. If after careful evaluation an assignment is feasible and the tenant has found a suitable replacement tenant, it should prepare a detailed proposal in compliance with the lease’s assignment clause. As mentioned above, it’s important that the tenant know whether a recapture clause is at issue. Assignments are particularly important to tenants with viable businesses that they believe can be sold for value.
If selling your business is not an option and you simply need to stop the bleeding, the following are some guidelines to approaching your landlord about early lease termination:
- While beyond the scope of this article, the first step in any analysis is to consider the bankruptcy option. In most cases, tenants personally guaranty the lease. Bankruptcy may be the best option for insolvent tenants. Contact a lawyer to determine whether this is an option for you.
- Consider whether the business can stay afloat for any length of time and continue to meet its rent obligations. Offering the landlord the option of continuing the tenancy while seeking a new tenant considerably lowers the damages. In such cases, landlords might agree to early termination terms that require a tenant to pay only the actual costs of procuring a new tenant (usually this includes advertising costs, broker fees, attorney fees, gaps in rent during the transition and any other costs associated with bringing on a new tenant including any inducements necessary to lure a new tenant). While these items are negotiable, landlords are usually determined to be made whole. In short, they don’t want to suffer any losses as a result of letting you out of the lease early.
- If you are still current on your rent, contact your landlord and have a frank discussion about your situation. Inform the landlord that the business simply cannot survive any longer under the current market and that continuing with the lease will inevitably drive you into bankruptcy which isn’t good for either side. In rare circumstances some landlords might even be willing to lower the rent temporarily to help a long time tenant get over the hump. In most cases, however, landlords will seek harsh early termination terms in order to overcompensate for any anticipated losses. Discuss potential options including continuing the lease temporarily as discussed above. Whatever deal is reached, tenants should be prepared to pay some premium for early termination. If the landlords demand is too high to pay at once, see if the landlord will consider payment options. The shorter the period for pay back, the more likely the landlord will agree.
- Tenants behind in rent have less bargaining power. Most landlords are quick to move forward with the eviction process (unlawful detainer actions). Nonetheless an open line of communication is the best way to avoid eviction. See if there is any way you can catch up on the rent with an agreed to payment plan and/or work out an early termination agreement that the landlord can live with.
In your negotiations, remember that landlords are concerned with making the right business decision, and while they may have some sympathy for long time reliable tenants, in the end most aren’t interested in how you got to where you are. They aren’t thinking about fairness. They want to be made whole. Focusing on practical solutions that will work for the landlord offered via clear and concise proposals provides tenants with the best hope of working out a reasonable resolution.
At the Law Office of Donald R. Oder, we will negotiate your the early lease termination of your commercial lease for a one time flat fee. If you would like to schedule a free consultation , contact experienced San Diego commercial lease lawyer Donald R. Oder at (888) 900-9002.