To get out of a commercial lease, the lessee must study the lease agreement, communicate with the lessor, and seek professional advice and other legal remedies. Getting out of a commercial lease is complex, but it is sometimes possible through an early termination clause, subletting, lease buyout, and other ways. Let us discuss these provisions in detail in the blog below.
How to Get Out of a Commercial Lease for Lessor and Lessee
To get out of a commercial lease agreement, a lessor may consider one or more of the following ways:
Lessor
- Early Termination Clause: This clause is usually present in some lease agreements. This clause specifies certain terms and conditions subject to which a lessee can break the commercial lease agreement.
- Consensus Between the Lessor and Lessee: Both parties may mutually agree to break the commercial lease agreement.
- Lease Buyout: A lease buyout implies that the landlord agrees to let the lessee terminate the lease agreement by paying monetary compensation to the landlord. This method relieves the lessee of liability and is a better way to terminate the lease agreement.
- Subletting: This is a more cost-effective lease termination method than a lease buyout. Subleasing allows the lessee to transfer partial rights of the commercial lease to another party for a short period. This method does not relieve the lessee of his liabilities. However, some leases require the landlord's prior consent before the lessee can sublease to another party.
- Breach of Contract: A breach implies the violation of one or more terms of the contract. This clause provides that the lessee can terminate the lease if the lessor causes any breach of contract.
- Surrender the Lease: The lessee may approach the landlord to ask for permission to surrender the lease. If the landlord agrees, the lessee should sign a deed of surrender. This will terminate the commercial lease agreement between the lessor and the lessee.
- Eviction by Lessor: Due to any default or breach on the part of the lessee, the lessor may issue a written notice. In this notice, he should state the reason for eviction and ask the lessor to vacate the commercial property.
Lessee
A lessee must consider the following tips on terminating a commercial lease before the expiry of its term:
- The lessee should ensure that an early termination clause is included in the agreement when signing it to safeguard their interests.
- In case of a lease buyout, the lessee should be prepared to negotiate by considering the current real estate market supply and demand, calculating the lease buyout penalty, taking help from an experienced real estate advisor, and understanding the motives of the lessor.
- If the lessee wants to save money and not opt for a lease buyout, they should consider subleasing as an effective solution.
- The lessee and the lessor should communicate and decide on the termination of the lease.
Implications of Getting Out of a Commercial Lease
Before breaking a commercial lease, one should know the consequences of the abovementioned action. These include:
- Facing Legal Consequences: The lessor is entitled to take legal action against the lessee if the lessee breaks the lease to recover any loss or damage or to enforce the agreement.
- Waiving Security Deposit: If the lessee breaks the lease, they expressly waive the security deposit they might’ve paid to the lessor when signing the lease agreement.
- Impacting Credit Score Negatively: Breaking a commercial lease can negatively affect the credit score of the lessee, which in turn will create more difficulties for the lessee to obtain loans or lease deals in the future.
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Tips to Prevent Getting Out of a Commercial Lease
Below are some essential tips for avoiding a commercial lease agreement termination:
- Have a carefully drafted lease agreement to cover all conflicts arising during the lease and their remedies. The agreement should also contain provisions for the security deposit and its recovery in case of termination of the lease agreement.
- Sublet a part of the commercial property instead of breaking the lease agreement. Terminating the lease is a cost-effective option as it does not stress the lessee with additional expenses for early lease termination.
- Include provisions regarding strategies for unforeseen events and situations in the lease agreement. This includes force majeure provisions and early termination clauses.
- Thoroughly research the commercial space before signing the lease agreement to ensure it is optimal and most suited for your business.
- If the company is a start-up business or fairly new, avoid entering into long-term leases as the company is still in the growing phase.
- Maintaining clear communication and addressing issues promptly helps establish a good relationship with the landlord.
- Include a lease termination clause in the agreement that outlines specific conditions or events under which the lease can be terminated early.
- Try to assign the lease to another qualified tenant or sublease the space if you need to exit the lease before the term ends.
- Negotiate a lease buyout or restructure with the landlord,if possible. The process involves reaching a mutually agreeable arrangement where you pay a fee or modify lease terms to terminate the lease early.
Key Terms for Commercial Leases
- Commercial Lease Agreement: A legal agreement between a lessor and a lessor describing the applicable instructions, terms, and conditions when a business rents out a commercial property to operate its business.
- Term Clause: The term clause defines the duration for which the lessee has possession over the property. The beginning possession date, the termination date, and in some cases, the lease renewal date are included in the termination clause.
- Use Clause: This clause defines the purpose for which the property has been given on lease. The purpose of including a use clause is to ensure that the lessee is not misusing the commercial property. Additional protection is provided to the landlord through this clause so that he can file for damages in case of any misuse of the commercial property.
- Security Deposit: This is a fixed amount of money deposited when signing the lease agreement as security to the lessor for any property damage during the lease period.
- Mutual Agreement: This clause defines a voluntary agreement between the tenant and landlord to terminate the lease before its automatic expiration.
- Lessor and Lessee: The lessor is the property’s owner, and the lessee is the party to which the said property is given on lease.
- Breach of Contract: This clause prevents the parties from breaching the terms of the commercial lease agreement. It contains the remedies available to the aggrieved party in case of any breach.
Final Thoughts on How to Get Out of a Commercial Lease
To get out of a commercial lease agreement, the lessee should review the lease agreement to look for any early termination clause. The lessee should negotiate with the lessor to include specific provisions which protect the lessee's interests. Getting out of a commercial lease can have adverse consequences for the lessee. Therefore, the lessor should consider all the consequences and ensure they are adequately equipped to face the challenges they will face due to breaking the commercial lease. According to the circumstances of their case, the lessee can finally consider any of the previously discussed ways of getting out of a commercial lease.
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