When Can a Tenant Break a Commercial Lease?

Filed under: Real Estate Law

While there are many reasons a tenant might need to break a commercial lease, two of the most common reasons involve the success of the business. Either an unfortunate turn of events leads to the end of the company, or the business has grown so quickly that a new, larger space is needed right away.

Whatever the reason, sometimes you may need to end your lease earlier than expected. As in most legal situations, the best solution is pre-planned prevention. In other words, the tenant will have inserted clauses into your original agreement detailing which circumstances will allow you to terminate the lease if sales projections fail to reach projected limits – most landlords will not accept such provisions – or more likely rely on a provision permitting the tenant to assign the lease or sublease the property.

If a tenant did incorporate “early out” language in the lease, terminating it may be as simple as reviewing the original document, making sure your situation meets the agreed-upon standards, and then notifying the landlord in writing of the situation. This underscores the importance of consulting with a real estate attorney before ever signing a commercial lease.

On the other hand, absent an “early out” provision, the tenant might still have several options:

1. If the space has increased in value such that the market rate is higher than the lease rent rate, the landlord might accept the property back in order to relet it at a higher rate. Even if the landlord is unwilling to take back the space, it may be possible to assign or sublet the leased premises. Again, it is important to make sure that the assignment and/or sublease provisions in the lease are not an impediment to that strategy for the tenant. In any event, a sublease or an assignment generally require the landlord’s consent which, again generally, cannot be unreasonably withheld.

2. Walking away from the lease is problematic, especially since many landlords require personal guaranties on commercial leases for other than very strong tenants. The law does require the landlord to mitigate its damages by taking reasonable measures to relet the property, but the damages can mount quickly and the attorney’s fee clause in most leases make fighting a mitigation case not economically feasible for most tenants.

3. Negotiate with the landlord. He may agree to settle for less than the full amount owed.

4. If you believe you need to walk away from the lease due to building safety, management practices or some other landlord breach, please consult with an experienced real estate attorney. Such actions are difficult to support and can be extremely expensive.

Keep in mind that breaking a lease can carry serious financial consequences, depending upon the terms of your original agreement. Always seek professional advice and attempt to mediate any problems before you reach the critical point of walking away from your legal obligations. More important, since almost all commercial leases are provided by the landlord, make sure that the commercial lease you sign has been properly reviewed by a real estate attorney so that you can negotiate those terms that are most important to you as a tenant.

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