Breaking a commercial lease refers to a condition when a tenant discontinues their lease contract before the end of the term without the lessor’s consent. In addition, breaking a commercial lease can occur for different causes, including relocation, financial difficulties, business requirements changes, or owner disputes. Nevertheless, breaking a commercial lease can have substantial legal and monetary repercussions for the lessee, including potential legal action by the lessor and monetary damages.
Ways to Break a Commercial Lease
There are different ways that a lessee can terminate a commercial lease. Some of the most prevalent methods are as follows:
A lessee can negotiate with the lessor to mutually break the commercial lease agreement. In this case, both parties decide to terminate the lease, and the lessee may be required to settle a termination payment or other damages.
Early Termination Provision
Some commercial lease agreements may comprise an early termination provision that allows the lessee to end the lease before the end of the lease term under specific situations, such as a company closure or a change in the lessee's financial situation. The terms and conditions of the provision will depend on the lease contract, so lessees should review their leases carefully.
Infringement of Contract
If the lessor fails to fulfill their responsibilities under the lease agreement, such as providing required repairs or maintenance, the lessee may be able to break the lease without paying the damages. Nevertheless, the lessee must provide a written statement to the landlord before doing so.
A lessee can sublet the commercial space to another party for the remaining lease period. However, subletting may not be authorized under the lease contract, so tenants should examine their lease thoughtfully.
Consequences of Breaking a Commercial Lease
Breaking a commercial lease can have considerable financial and legal repercussions for the tenant, including the following:
Loss of Security Deposit
If the lessee has provided a security deposit, the lessor may use it to cover any outstanding rent or damages caused by the lessee.
A lessee who breaks their commercial lease agreement may be mandated to settle the rent for the remaining lease period and any other expenses associated with finding a new lessee, such as advertising or brokerage expenditures.
The owner may take legal action against the lessee to enforce the commercial lease agreement or to recover any monetary losses incurred by the lessee's early termination.
Difficulty Finding Future Commercial Rental Space
A lessee who has broken a commercial lease may have difficulty finding a new one, as lessors may view them as high-risk tenants.
Negative Credit Effect
Breaking a commercial lease can adversely affect the tenant's credit score, making it more challenging to get future loans or lease deals.
Tips for Breaking a commercial lease
Breaking a commercial lease can be a hard decision for every lessee. Whether you need to move to a new location, downsize your company, or close it down completely, breaking a commercial lease can be a complex process that concerns legal and financial commitments. Below are some tips to help you break a commercial lease without facing extreme penalties or legal repercussions.
Review Your Lease Agreement
The initial step in breaking a commercial lease is thoroughly reviewing the lease contract. The commercial lease agreement is a legally obligatory document that summarizes the terms and conditions of your tenancy.
It will offer valuable details about your rights and responsibilities, including the notice term, damages for early termination, and any other provisions that may affect your capability to break the commercial lease. Also, it is essential to understand your lease contract before taking action to break it.
Have Clear Communication with the Landlord
Breaking a commercial lease can be a complex procedure that demands clear communication between the lessee and the landlord. The property owner is vested in keeping their property inhabited and may be ready to work with you to find a mutually advantageous solution.
In addition, open communication with your lessor can help you negotiate a seamless transition out of your commercial lease. Hence it is rational to plan a meeting with your landlord to discuss your situation and be upfront about your grounds for breaking the lease. They may be able to offer you a buyout alternative or timely look for a new lessee to take over your lease.
Provide Required Notice
The notice period is the time frame you must provide to your landlord before vacating the premises. Your commercial lease agreement will specify the notice period mandated, which generally varies from 30 to 90 days.
If you fail to provide proper notice, you may be subject to monetary fines, such as an extended period of rent payments or a loss of your security deposit. So you must always provide written notice to your lessor and keep a copy for your documents.
Find a New Lessee
Finding a new lessee to take over your lease can effectively break your commercial lease without incurring considerable expenses. This alternative is especially advantageous if you have a long-term lease agreement and cannot afford to settle the remaining rent.
You can promote the property to possible lessees or reach out to other companies in your industry interested in carrying over your lease. Your lessor may also be ready to help you find a new lessee if you communicate your situation evidently and professionally.
Mediate a Buyout
A buyout alternative may be available if you cannot find a new lessee or cannot afford to settle the outstanding rent. A buyout is an arrangement between the lessee and the landlord in which the lessee pays a fee to break the lease early. The buyout fee can differ depending on the lease provisions and the time remaining on the commercial lease. Therefore, you must always remain prepared to negotiate with your lessor for a fair and affordable buyout fee.
Subletting is another alternative that can help you break your commercial lease without incurring substantial expenses. Subletting is the comprehensive procedure of leasing the property to another lessee while remaining accountable for the lease.
This option can be useful if you have a short-term lease or need to move temporarily. Nevertheless, subletting can be complex, and ensuring that the new lessee complies with the lease provisions and pays the rent on time is essential. Thus, reviewing your lease contract and communicating with your lessor before subletting the property is always better.
- Option to Renew: A provision in the lease contract that gives the lessee the privilege to renew the lease for an additional duration at the end of the existing term.
- Rent Escalation Clause: A provision in the lease agreement that provides for regular rent increments to keep up with inflation or other aspects.
- Security Deposit: A sum of money settled by the lessee to the landlord as a security against any damages or outstanding rent during the lease term.
- Maintenance and Repairs: The lessor and the lessee's responsibilities for upkeep and repairs of the commercial property, including who is accountable for what and the time frame for making repairs.
- Subletting: A provision in the commercial lease agreement that defines whether or not the lessee may sublet the commercial property to another party.
In a nutshell, breaking a commercial lease can have legal consequences, especially if you fail to follow the terms and conditions of the commercial lease agreement. Thus, seeking legal advice from a lawyer specializing in commercial real estate law is vital. An attorney can evaluate the lease contract, advise you on your legal commitments, and help mediate with the landlord. They can also assist you in understanding the legal consequences of breaking the commercial lease and help you avoid expensive legal disputes.
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