Committing to a long-term agreement like a commercial lease is a potentially frightening proposition as a business owner – especially if you’re just getting started. But even more uncertain than the lengthy duration of a commercial lease agreement is the possibility that you may need to leave the agreement early. Whether it’s due to insolvency or (hopefully) the need to expand your team beyond the space’s capability, breaking a commercial lease agreement can be a complicated – and expensive – proposition for any company.
Depending on the wording in your commercial lease agreement, you may be on the hook for the remainder of the lease term as well as any applicable penalties and fees.
Why Would a Company Need to Break a Commercial Lease Early?
Hopefully, the primary reason a company would need to break their commercial lease is to expand into a larger space in order to accommodate unexpected growth. The other (unfortunate) side of the coin is insolvency, bankruptcy, or closure of your business. While there’s wiggle room in between for unique circumstances, these two scenarios are the most common.
How to Save Money Breaking a Commercial Lease
There are ways to save money on the remainder of your commercial real estate lease agreement. The most common is to locate a subletter, allowing another tenant to take custody of the property for the remainder of the lease under the same terms. However, that leaves you ultimately responsible for any damage to the property until the conclusion of the lease and typically need to be approved by the landlord.
The potential for locating a subletter depends on market conditions, the landlord’s willingness to approve a subletter, and the wording in your original lease agreement.
Depending on the language contained within the lease agreement, you may not have the option to sublease the space at all. More moderate terms are common, allowing tenants to sublet the space at the landlord’s approval and at their discretion. Others strictly prohibit any form of assignment or subleasing whatsoever, making the issue more difficult for those seeking to end their lease.
As we’ve discussed in more depth and detail, subletting a commercial real estate space allows you to reassign the financial responsibilities associated with the lease until its conclusion, but typically leaves the original leasee (you) responsible for any damages to the property until the original term is complete. But, on the other hand, if you find a reputable subletter who will pay their rent on time, care for the space, and has the intent to sign a new lease when your original term is done, it can be a huge financial boon for your business – especially if you’re moving into a larger, presumably more expensive, space.
How to Negotiate a Lease Agreement with Easier Termination Terms
Having a tenant representative broker on your side during the initial lease negotiation process will help you lay out any “must-haves” on your end of the bargain, helping you with early termination penalty clauses and options for buy-outs within a certain timeframe. Landlords, especially in down markets, will want to provide themselves enough time to make necessary repairs and list the property on the market before your exit, so having language in place for early exit notification and stipulations on penalties will typically be the best outcome you can get in this situation.
However, in places with booming commercial real estate markets, landlords may be willing to negotiate on an amendment to the lease agreement to leave early with more favorable terms. The bottom line: if the landlord can secure another tenant at higher monthly rates within the timeframe, you may be able to break your lease with minimal penalty.
The other factor where a tenant rep broker would be an asset in negotiating for subletting or assignment, therefore allowing you (with the landlord’s approval) to pass along the remaining term of your lease to a third-party. In most cases, you’d be ultimately responsible for the original security deposit and their monthly rent, but would require them to pay you the monthly rent until the lease expires. It’s a more convoluted process than many landlords are willing to accept, but if you have leverage during the initial lease negotiation, you may be able to afford yourself this valuable early exit strategy should the need arise.
How to Protect Yourself Against the Possibility of Breaking Your Lease Early
Aside from the aforementioned legalese and negotiations, businesses wishing to protect themselves against the possibility of terminating their lease early can do the following:
- Be realistic: Does your company need this much additional square footage? Will you reasonably grow at the same pace you expect from your business plan at the time of signing? Are market conditions moving in the right direction to invest in a long-term commercial lease agreement, or are you being overly optimistic? You need to ask yourself – and your team – these important questions before making such a substantial investment in a commercial real estate lease and lock yourself in for the duration.
- Perform a third-party business audit: As a business owner, you’re constantly looking at the numbers. With a boost of success, it’s normal to feel validity in your achievement, but you can also get rose colored glasses. Before you make a substantial investment in a long-term commercial real estate lease agreement, consult with a business analyst or financial advisor to make sure you’re approaching this next step with the best data possible.
- Find office space with room for growth – or retraction: While some spaces may not be glossy or glamorous, they could provide room for your company to expand or retract with an amendment to the lease agreement as needed. Making a moderate expansion in a new space is ideal, but if you’re uncertain about the future prospects of your company, then you should find a space that can accommodate a modular office concept should the need arise.
- Be flexible with a smaller space: Even if you’re bursting at the seams at your existing space, moving to a slightly larger or otherwise more suitable facility on a shorter-term lease agreement could be beneficial as your company grows. While space for additional employees could be a struggle, alternative working solutions like rotating work-from-home days, remote workers, and a monthly rental for shared coworking spaces for your employees could mitigate these stresses and keep everyone productive.
As with any business agreement, you’ll want to ensure all your bases are covered before you approach your landlord with a request to break your lease agreement early. Depending on your history, duration of tenancy, and market conditions, the property owner may be more willing to allow you to end your lease agreement earlier than anticipated. Be sure to give them plenty of time as a notice and consult with your tenant representative broker to ensure the process goes as smoothly as possible for both sides.