How Do I Get out of My Commercial Real Estate Lease?
“Getting out” of a lease for a business is usually a last resort, but sometimes a necessary one. The good news is that there are methods available to expedite an early out. Planning before the lease is signed is essential. Inability to pay the rent isn’t the only reason a tenant may need to break a lease. It may be more important if you are very successful and need larger space. Here are the lease clauses and methods to consider:
- Subleasing
- Assignment
- Desk-sharing agreements
- Options to cancel
- Buyout
- Landlord breaches
Subleasing and Assigning
The sublease and assignment clause is one of the places in a lease where tenants and landlords negotiate “exit” strategies for a tenant. Landlords want restrictions. Tenants want flexibility.
For example, a landlord may want to prevent the tenant from subleasing to a company that is in poor financial condition and likely to go out of business. Landlords and tenants negotiate over what they consider a financially viable subtenant.
Tenants want the right to sublease to an already-established tenant in the same building. Landlords want to restrict this because it interferes with the building’s profitability.
Landlords want the right to recapture space, a clause which prevents the tenant from profiting on subleasing by allowing landlords to take the space back with the newly found subtenant paying a higher rent.
There are a myriad of these types of issues. The sublease and assignment clauses can be 10 plus pages long, so there is a lot to consider and tussle over.
Desk-Sharing Agreements
We like to include a desk-sharing agreement in our tenants’ leases. This gives tenants an explicit right to license desk space to other companies and individuals and is advantageous because usually no construction is involved. If a company has excess space and there’s another company in a similar industry, it often works out well, because there might be inherent synergies of being under the same roof. The licenses are usually anywhere from 30 days to 6 months, but could be any length of time and normally have extension options.
Landlords in general have become much more open to desk-sharing arrangements because the price of space has become so expensive and it ensures that the tenant can pay rent. As long as it doesn’t change the character of the building and the traffic does not overburden the rest of the property, most landlords are willing to abide with a desk-sharing clause.
Option to Cancel
Some companies’ operations are dependent on a specific outside circumstance which can change or cease business entirely. In a case like that, it is imperative that the business obtain a lease with an option to cancel. An option to cancel must be included when the lease is being negotiated.
For example, a business losing a major contract or a large portion of funding could trigger the option to cancel. Typically the landlord will require a test or requirement for the tenant to surpass in order to exercise the option to cancel. Most landlords are open to cancellation options, as long as the non-cancel portion of the term is sufficient to cover all the initial lease costs.
George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016
646-312-6800