Is your firm restructuring? Does it want to extricate itself from an onerous lease? Assuming that you have not negotiated an early buy-out or break lease clause, here are some tips that may enable you to walk away from pricey office space without paying the remainder of the rent or incurring termination charges.
Negotiate Favorable Conditions in the Lease as a Starting Point
Before entering into a lease with a landlord, do your due diligence on the property which includes a review of; (a) options under the lease to terminate early, if any, (b) an understanding of the sublet and assignment provisions, (c) competitive space, if any, available in the building and in the area to get a sense of what is achievable by way of sublet and assignment, (d) using information in (c) to calculate a baseline of expected losses (and also to see if on an accounting basis, if future year losses need to be accelerated and whether the firm is prepared to take the current year p/l hit). No two situations are the same so there is no clear path for exiting a lease, as it depends on all these factors, including the willingness of the landlord to work with you and the threat of bankruptcy (a landlord's worst case is having a bankrupt tenant occupying space without rent).
If you have already entered into a lease and need to exit, we recommend consideration of the following tactics.
The Obvious Options
The first option is to speak with the landlord to inquire about available options, such negotiating a buy-out of the remainder of the lease at a discount or walking away from the lease and permitting the landlord to retain your security deposit. If the rental market is hot and the space can be easily re-let at a higher rate, the landlord might consider letting you walk away with little to no penalty; however, the probability of this outcome is usually low to non-existent.
Or, you could consider the nuclear option, which would be to walk/run away from the lease and force the landlord to sue. Under this option, you (the tenant) and the guarantor, if any, remain obligated for the remainder of the rental payments, provided that the landlord does not mitigate his damages.
But you already know these options. What other remedies may be available to you either by law or by contract?
Punching Holes in the Lease
Perhaps your lease provides an out. Generally a commercial lease imposes upon the landlord certain obligations and representations such as ensuring that the space will comply with the relevant building codes, provide accessibility and provide the tenant with quiet enjoyment of the space. Failure to comply with these obligations may result in constructive eviction of the tenant, enabling the tenant to break the lease. Examples of landlord breaches that this Firm has handled include:
- during construction of an adjoining space, a client’s operations were so impaired and interrupted that it could not conduct its business.
- where the client submitted notice to its landlord, which was obligated to make material repairs to the space’s security, but failed to do.
- failure to clear walkways and garbage resulted in a rent abatement.
- frequently inspects apartment without notice to tenant infringing on a client’s normal business activities.
If your landlord is not in compliance with any of the above-mentioned violations, you may be able to terminate your lease with no penalty.
Sublease, Assign, Reduce, or Share the Space
Your lease may include options to mitigate your exposure to the remainder of the rent payments, such as subleasing, assigning, or sharing your space. Subleasing can cover any period of time less than the remaining term of the lease; an assignment is for the remaining term of the lease; and a “share the space” clause may enable you to coexist within the space with a sub-lessee. These options likely require written consent from your landlord, but they do provide an option that the landlord may consider.
File for Bankruptcy
Bankruptcy would likely end your firm’s obligations under a commercial lease, and the threat thereof may force a landlord into accepting a buyout of the remaining rent at a reduced rate. But any guarantor on the lease would still be at risk personally for the remaining rental payments, which is not a desired outcome.
No Obligation on Landlords to Mitigate Damages
Unfortunately, New York case law does not impose a duty on commercial landlords to mitigate damages in the event that a tenant breaks its lease. In disputes between commercial tenants and their landlords, the New York Court of Appeals, has held that landlords did not have to mitigate damages — unless the lease specifically stated otherwise. As a result, the landlord has no duty to try to re-let the property, but may sue the defaulting tenant for the total rents due under the lease term.
Negotiate Terms When Entering the Lease
Be proactive when entering into a lease agreement. The insertion of an early buy-out, break lease clause, or cap on an early termination fee all work in your favor. In addition, negotiate an assignment and sublet clause in case you want to exit early. One final idea for you to consider is the inclusion of termination clause that gives you a onetime right to leave early — for example, after three years of a five-year lease — in exchange for paying a penalty.
If your lease does not include a personal guarantee, the landlord may have more incentive to work out an agreement to keep you in the space. In that case, the landlord might offer you a rent reduction.
Leases are some of the most difficult contracts to break without incurring a substantial penalty. Nevertheless, it can be done under the right circumstances. Before you take drastic action to terminate a lease, it may be in your best interest to reach out to your landlord for assistance. Your landlord may be work with you to achieve a mutually successful outcome.