The average commercial lease lasts between three and five years. What if the lease isn’t over yet, but you need to get out of it?
The COVID-19 pandemic recently reached the United States, upending not only people’s everyday lives but also various aspects of business operations. Specifically, the virus-driven stay-at-home orders have forced many employees to work from home and caused many companies to lose revenue or even close their doors.
If you find yourself in a position where you can no longer use—and maybe can no longer afford—your commercial real estate space, whether it’s retail or office space—you may be asking if you can reduce the length of the lease or get out of it altogether.
The short answer is yes, you can. Here’s what you need to know.
Ask a Tenant Broker and Check Your Lease
If you are out of options and need to shorten or end your commercial lease, there are ways, depending on the circumstances. The best way to navigate such a circumstance is to work with a tenant broker, who can help you find a solution that serves both parties.
First, reread your commercial lease contract, find the clause about breaking the lease, and understand what each party’s obligations are supposed to be. Then, instead of simply accepting the terms and bowing out, gear up to negotiate.
Remember that landlords are facing tough financial decisions in the days ahead as well, so we are all in this together. Your goal should be to get out of the lease with as little financial burden as possible.
Negotiating to Shorten a Commercial Lease
Commercial leases often stipulate that a tenant will face financial penalties for ending a lease early. Before you simply accept these terms and shorten or end the lease, always try to negotiate a better option. Keep in mind that laws and guidelines for lease-breaking vary from state to state and sometimes also from city to city.
Be sure to learn about local rules and tenant rights before proceeding. Here are some ways you can negotiate your financial responsibility when you want to get out of a commercial lease:
- Ask to temporarily reduce your monthly rent. Perhaps you can renegotiate the lease terms and pay reduced fees for rent until things get better, until you figure out another option, or until the lease is up.
- Sublet the space. You might also consider subletting the space. That way, you are no longer responsible for the rent. Remember, however, that you would be responsible for any damages the sublessors do to the property, and you’d have to make sure acquiring sublessors doesn’t contradict lease terms for any other tenants of the property.
- Ask the landlord to forgive the early-termination penalty. If your lease contract stipulates you need to pay a penalty to get out of the lease, ask the landlord to waive it. If necessary, bring up any less-than-ideal conditions of the property or amenities and mention anything the landlord or other tenants did that may have breached the contract.
- Ask for full or partial rent abatement: From a landlord’s point of view, something is better than nothing. When you request an abatement, you’re asking for a break from paying rent for a certain number of months. Usually, the tenant then pays that amount in full (often with interest) after the time is up. Obviously, this type of arrangement requires trust between the landlord and the tenant. In the case of partial rent abatement, the tenant offers to pay only a percentage of the monthly rent for a set amount of time. For example, the tenant might pay 75% of the rent for the remaining six months of the contract. Sometimes, the tenant can get away with not paying back the remaining percentage of the rent when the agreed-upon time is up. It all depends on what you can negotiate.
- Ask to use your safety deposit to pay the rent: Landlords may ask for several months of rent upfront as a security deposit. Though these funds are typically applied after a tenant moves out to repair any damages to the property during the tenancy, sometimes the security deposit can be used for something else during the lease. Of course, this option only works if the landlord hasn’t applied your security deposit in the past. Ask if the safety deposit can be applied to pay rent, and it may buy you a few months.
Closing the Deal to Shorten Your Commercial Real Estate Lease
Before you approach your landlord with written notice that you wish to shorten or end your office or retail space lease, make sure that you have done your research, decided what to ask for, and drawn up the paperwork. After you discuss it and come to an agreement, make sure both parties have signed, making it official.
While you may have a great relationship with your landlord, this is still business. If you have more questions, please contact us to speak with a tenant broker.