Industry jargon. Commercial real estate is chock-full of it. Whether you have negotiated a commercial lease before or it’s your first time, chances are you will run into some potentially... Read More
It happens to the best of companies, both big and small, young and well-established. A year or two into a long-term lease and it feels like breaking your commercial lease is your only option.
Let’s face it. Breaking a commercial lease isn’t on anyone’s to-do list, but when it seems unavoidable, it is important to be prepared. Whether you’re already at the point of needing to break the lease or have just started thinking about it, keep reading to learn the main reasons commercial tenants end their lease early, how you can save money on rent in the process, and tips to help you avoid breaking your lease in the future.
Why you might break a commercial lease
Each business will have a unique reason, or set of circumstances surrounding why they need an early termination. Startups are especially susceptible to change and are often in a greater need for rent flexibility to match their uncertain future.
Let’s go over some of the reasons it might be time to give notice to your landlord and terminate your current office space lease.
- Expanding and in need of more space: Congratulations! Your company is growing and can no longer be contained by your current office space. Know your current office space is too small but not sure what size you need? Use SquareFoot’s Office Space Calculator and we’ll do the math to find you your ideal space.
- Downsizing and need less space: Whatever the reason for downsizing, sometimes your current office space just becomes too big. It is never easy to cancel a lease obligation. But instead of paying rent for square footage, services, and amenities you’re not using, breaking a lease can actually save you more money in the long run.
- Finding a space that is a better fit: There are a lot of factors that go into picking the right location for your company’s offices. Your current office space might be the right size, but maybe the commute is too long for most employees, you want to be closer to your clients, or you’re looking for a neighborhood with the right culture fit. The positive impact on your company by simply adjusting the property location might be well worth breaking your office space lease.
- Landlord failing in lease obligations: You love your office space, but when it comes to your landlord…not so much. If your landlord has been negligent in upholding the lease, particularly in ways that make the space or building unusable, you can negotiate a deal to end your rental agreement early. Your landlord may consent to terminate the lease instead of going to court.
How to minimize costs while breaking a commercial lease
Ending a commercial lease months, or even years early may come with a price tag, but there’s a number of ways to keep your final figure low. Keep in mind that market dynamics will play a role in both determining whether your landlord will be amenable in letting you break your lease early (if you don’t have termination language written in your lease) and how much early termination might cost you.
For example, if you’re renting office space in an up-and-coming neighborhood with low vacancy rates, it may be in your landlord’s interest to let you vacate the office space so they can raise the rent for the new commercial tenant. However, if there’s a high percentage of vacant office space and finding a new tenant quickly doesn’t seem promising, you’ll likely be held more accountable financially.
Option to sublease
Subleasing your office space can be an excellent way to minimize costs and achieve an early exit — as long as you’re prepared to remain involved with the property until your original lease is up. Landlords often include a written sublet clause in a commercial tenant lease that stipulates whether subleasing is or isn’t an option. If you are looking through your lease and don’t see any terms related to subleasing, it doesn’t hurt to ask your landlord to renegotiate those terms (and it helps if you can suggest another tenant).
Subleasing means you are still responsible for the lease and you’ll be liable for any damages or lease violations that occur during the sublease. It’s also possible that the landlord will charge fees associated with the sublease, so be sure to factor those into your budget.
Landlords can be more favorable to a sublease if you’re nearing the end of your lease and the market is in high demand. In that situation, they may even consider a lease assignment, which means the remaining interest of your lease is transferred entirely to a new tenant.
If you are looking to sublease your office space working with a tenant broker may help. A tenant broker can find you a new location in addition to securing a new tenant to take over the remaining months left on your lease. For example, SquareFoot has the functionality to post your sublease on their office listings platform so prospective tenants can view your space.
Office lease buy-out
You can also negotiate with your landlord to buy-out your remaining lease. This could come in the form of all or part of your security deposit or a lump-sum payment. Again, landlords are far more willing to negotiate a buy-out if there’s an optimistic outlook on finding a new tenant. An office lease buy-out will likely cost you more than a sublease, but The Self Employed offers some simple math to keep that cost in perspective.
“Let’s say you have a year left at $1,000 a month. A leasing company might be willing to take less if it thinks it could lease it again fairly quickly. In that case, an offer of say, $5,000 might work. Hey, it’s less than $12,000, right?”
Termination or exit clause
If you’re in the situation where your landlord has failed in upholding certain obligations of the office space lease, you can invoke the termination or exit clause. Research your state’s commercial real estate laws and keep track of any instances where your landlord can be held liable for breaking the lease, so you have a record to present if legal proceedings ensue.
The key to all these options is negotiation. While it’s best to negotiate the terms of your office space lease with the landlord before you sign, you’re not out of luck if you didn’t foresee ending your lease early when you entered your rental contract. Bring as much information as possible to the negotiation table and demonstrate willingness to compromise, and chances are good you’ll be able to strike a deal with your landlord.
Breaking an office space lease doesn’t have to be difficult and expensive. Preparation and information will help smooth the process over, but since all commercial tenants would prefer to not go through the process in the first place, here are some tips to avoid breaking a lease in the future:
1. Consider flexible office space instead of traditional office space.
Flexible office space continues to be a modern trend and, as an added bonus, remains more affordable than traditional office space in most cases. While there are certainly trade-offs, flexible office space leases tend to be more, well, flexible and landlords often won’t try to lock you into a five- or ten-year lease. If you’re ready to bring your creative A-game in making a flexible office space the perfect, unique environment for your company and you anticipate needing to rearrange every now and then, renting flexible office space is an excellent strategy to avoid a future broken lease. SquareFoot offers a number of flexible options that can provide solutions to avoid an early termination.
2. Avoid long leases during high-growth periods.
Even when renting traditional office spaces, you might be able to negotiate a shorter lease. FLEX by SquareFoot offers our clients lease term flexibility and office services typically only provided by coworking operators. Benefiting both you as the tenant and the landlord. If a lease of even one to two years brings up some commitment phobia (particularly for start-ups!), it might be a sign that your company could thrive in a coworking space. Most coworking spaces have multiple short-term lease options that allow you to re-adjust easily when changes to the company arise, plus the convenient amenities of a shared space. Eventually, the inflated rates that come with the flexibility force companies to move on from coworking, but it can be an ideal starting point for small teams (2-10 employees) with too much volatility to make a long-term lease commitment.
3. License part of your office
Rather than cancel your rent agreement, your landlord may consent to you using PivotDesk. PivotDesk is an online marketplace that connects businesses that are trying to find or advertise shared office space options. Think Airbnb for office space where you get to meet your neighbors first. Essentially, as the host you can monetize the excess space in your office by subleasing to another tenant without you having to move elsewhere. Allowing you to recoup some of your commercial real estate costs. This is a great solution whether you find yourself needing to downsize or if you are growing rapidly and take on excess space during the growth period.
4. Read the lease!
Breaking a commercial office space lease should never be an afterthought. The best way to avoid, or at least prepare for, breaking a lease is to read the lease thoroughly and identify all information relevant to breaking the lease early. It is important to keep an eye out for financial penalties that may be related to breaking a lease, how the security deposit comes into play, and whether you have a right to sublet the property. If you aren’t sure where your company will be two years or even six months from now, familiarize yourself with the options above — if the one that sounds best for you isn’t included in the lease, negotiate!
Note: SquareFoot is not a legal services firm, and is not providing legal advice in this blog post. In the case of breaking a commercial lease, you should consult a legal or financial professional as needed.