You found the perfect location for your business, retail store or office, and you are ready to sign the lease! Unlike residential leases, which usually have a 1-year term, a commercial lease can be much longer, typically 5-10 years. Before signing a commercial lease, a business tenant should consider all the ways to get out of the lease should something go wrong with the business or the location.
Commercial Tenant Exit Strategies
The first way to get out of a commercial lease is to simply walk away. Close your doors and deal with the landlord. The landlord will keep your security deposit and, if you provided a personal guaranty, the landlord may go after the business and personal assets to recover the unpaid rent or damages.
A business tenant should carefully review the lease to find out if the tenant is liable for the entire term of the lease (called a “rent acceleration” provision) or if the tenant is responsible for the balance of the lease until re-rented to a different tenant at the same or higher rent.
It is also necessary to review the lease and the state specific law on the landlord’s duty to mitigate damages. This duty requires a landlord to actively try to find a replacement tenant to “mitigate” the landlord’s damages. In states that do not impose such a duty (e.g. New York), the landlord can simply sit on the empty property and make the old tenant pay.
Another exit strategy in a commercial lease can be found in the assignment and sublease provision. If the business tenant wants out of its commercial lease, it may assign the entire space for the entire term of the lease to an assignee via an assignment agreement. Alternatively, a business tenant could sublease a portion of the space (or the entire space) for a portion of the term (which could be the term less one day via the sublease provision).
Both an assignment and a sublease will likely require landlord’s review of the proposed assignment or sublease agreement, a review of the assignee’s or sublesee’s financials and landlord’s reasonable consent to the transfer. The exit strategy of an assignment may provide for a full release of the business tenant’s obligations as well as release the original guarantor. With a sublease, however, the business tenant remains on the hook for the lease if the subtenant doesn’t pay rent or breaches the lease in some way. For these reasons, an assignment is a more effective exit then a sublease.
Finally, another exit strategy is to negotiate a buy out. If real estate market rents are on the upswing, the landlord may be willing to let a tenant pay a lump sum payment to be released from the lease. This leaves the landlord with vacant space to rent to a new business tenant at a higher rent. A win-win for both parties.
In the end, a business tenant should carefully review the exit strategies with an attorney before signing a commercial lease agreement.