Whether starting a business and signing a new commercial lease, or moving, closing, or selling an existing business, understanding when breaking a commercial lease is permissible – and not permissible – can save valuable time and money. As with most business agreements, the specific language of the lease contract will detail the obligations and responsibilities of all parties. Business owners and operators must understand several vital aspects of their lease and what steps they must take when breaking a commercial lease to minimize or eliminate liability exposure.
Part of being a smart business owner is finding a physical location that will provide high visibility and walk-in traffic from nearby stores or businesses that appeal to the same target demographic. Retail developers are encouraging businesses to lease their properties by designing more intimate, walkable shopping centers. Business owners must realize a commercial lease is very different from a residential lease. A person renting a home may only have to worry about losing a security deposit or a small penalty fine for breaking a residential lease; however, breaking a commercial lease is a much more serious matter with significant consequences that is best handled by consulting business litigation lawyer.
How To Terminate or “Break” A Commercial Lease Early
Many business owners need to end their commercial leases before the term is over and have good reasons to request an early release. The business may have outgrown the leased space, had a significant decrease in customers, or need to close its doors and go out of business. Before breaking a commercial lease, business owners must review the terms of their lease to understand each party’s obligations. Generally, the tenant in a commercial lease can only terminate the contract before the term expires without liability if a specific provision in the lease allows for early termination.
If the business is in a highly desired physical location, the property’s landlord may be willing to consider an early termination of the lease. Business owners can attempt to negotiate with the landlord to terminate the lease early by offering a lump-sum payment to end the lease. Other options that may be potentially available to a commercial tenant that needs to end their commercial lease include:
- Break Clause: Some commercial leases may contain a break clause giving the landlord or the tenant an option to end the lease at least once during the term. A break clause can only be invoked if its conditions are met. Commercial landlords, however, rarely agree to include a termination clause in a commercial lease agreement.
- Bailout Clause: If there is a bailout clause in the lease, it allows the tenant to be released early if their sales do not reach a predetermined level over a designated period of time.
- Lease Transfer or Assignment: If the property’s landlord is open to transferring the lease to a new tenant, the existing lessee may be able to assign its interest to another party before the lease term expires. This must be included in the lease as an addendum. If a clause allows for a lease transfer, pay attention to its terms, as landlord approval of a new tenant is commonly required in order for the transfer or assignment to occur.
- Sublease: The business owner can also ask the landlord to sublease the property to another business for the remainder of its lease term. Some commercial leases contain a sublease clause negotiated before signing. If there is a sublease clause in your commercial lease, pay attention to whether the landlord approval of new potential tenants is required.
- Force Majeure: Most leases contain force majeure clauses that delineate specific events (e.g., government regulations or extreme weather events) that should they occur will cause the cessation of certain obligations under the terms of the lease agreement. Most such clauses do not fully absolve a tenant of paying rent.
- General Negotiations: Both parties to a lease are free to negotiate and modify the details of the lease, including its duration and financial details, while the lease is active. This may help a business owner who is close to breaking their lease and can prevent legal action from being taken.
If these options are either unavailable or fail and a business owner still needs to end their lease, the tenant should always provide written notice to the landlord stating their intention to end the lease at an earlier date than expected. The landlord may want to forgo legal action and reach an agreement on an amount to cover the remaining rent. If a commercial tenant cannot reach an agreement with the landlord, the business – and possibly the owner – may be held liable for all unpaid rent. When a landlord refuses to negotiate or threatens litigation against a tenant trying to renegotiate a lease, it is time for that tenant to seek the counsel of a knowledgeable business attorney.
Texas Contract Law and Termination of a Business Lease
Commercial leases are typically treated as a contract by the courts, and unless there is a provision in the lease to the contrary, usual contract principles apply. The terms specifically included in the lease will dictate how that lease is interpreted and enforced. If a long-term commercial lease is broken or “breached,” the tenant should expect that contract dispute to be litigated.
When a commercial landlord claims a breach of contract has occurred, they will need to prove:
- The contract existed and was valid
- Both parties had obligations under the contract
- How the tenant breached the contract
- The breach was material to the contract
- The landlord suffered damages that were caused by the tenant’s breach of contract
The business owner tenant often has a defense to enforcement, or a good reason why its liability should be limited. There may have been misrepresentations made by the landlord or problems created by poor maintenance or property upkeep that justify the breaking a commercial lease. At this point, the tenant needs a Houston real estate attorney to review the terms of the lease and guide them through the legal process.
What is the penalty for breaking a commercial lease?
Commercial leases are legally binding contracts. In most instances, a commercial lease drawn up by legal counsel will have a remedies clause that outlines what will occur if a party breaches the contract. Typically, when a renter breaks a lease, the landlord has the right to keep the security deposit that was put forward when signing the lease. In addition, the landlord can sue the tenant for othe losses or damages incurred unless and until the space can be rented out again. Under Texas law, when a lease is broken without a legally valid reason, the landlord must attempt to find a new tenant to lease the space. If they cannot, the lessee must pay the remainder of the rent payments due under the lease along with potentially other damages including but not limited to costs to secure a new tenant for the space (including advertising, cleaning, and repairing), funds due under a liquidated damages clause, attorneys’ fees, and more.
How can a tenant break a commercial lease legally?
The commercial lease is a legally binding contract and its terms must be reviewed to look for early termination clauses that allow a tenant to get out of a lease if sales are low (or for another reason explicitly stated in the contract). In addition to a looking for a freak clause or bailout clause, tenants that need to break a commercial lease should also look to see if their lease contains a co-tenancy clause that allows for lease termination when an anchor tenant leaves or occupancy drops below a designated level.
Another way to legally break a commercial lease is by coming to a negotiated agreement with the landlord where they can rent it for more money and/or the tenant offers a lump sum payment to cover the remainder of its financial obligation. Other reasons a tenant can legally break a commercial lease can include the landlord breaching the contract, the tenant filing for bankruptcy, and a legal sublet or transfer if available under the terms of the lease agreement.
For Houston business owners, rental costs can be a significant financial burden. While some landlords attempt to work with tenants unable to make rent payments, others may refuse to negotiate. Through negotiations facilitated by an experienced breach of contract lawyer, Texas business owners can navigate the complications that come along when you need to break a commercial lease and they will be prepared for the unexpected. If you or someone you know has questions about breaking a commercial lease, the Houston breach of contract lawyers at Burford Perry LLP can help. Contact us today.
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