Whether starting a business and signing a new commercial lease, or moving, closing, or selling an existing business, understanding when it is permissible—and not permissible—to break a commercial lease can save valuable time and money. Entrepreneurs must understand several vital aspects of a commercial lease.
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 can affect the future of the business.
Circumstances for Legal Early Termination
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 attempting to break 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 for the tenant to research regarding early termination 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. Only if the conditions of the break clause are met can it be invoked. 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, this will allow 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 business owner, the tenant may be able to assign their interest to another party before the term of the lease expires. This must either be written either in the lease as an addendum to cover this option. If a clause allows for a lease transfer, pay attention to the terms of that clause, as it commonly requires the landlord to approve the new tenants for the transfer or assignment to take effect.
- Sublease: The business owner can also ask the landlord to sublease the property to another business for the remaining term. Some commercial leases can have a sublease clause negotiated before signing. If there is a sublease clause in the commercial lease, again pay attention to whether the landlord has the right to approve new potential tenants.
- 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 fail and the business owner still needs to break the lease, the owner should always provide written notice to the landlord stating the intention to break the lease at an earlier date than expected. The landlord may want to forgo legal action reach an agreement on remaining rent. If an owner cannot compromise with the landlord, the business, and possibly the owner, may be held liable for all unpaid rent. When the landlord refuses to to negotiate or threatens litigation, it is time to seek a knowledgeable business attorney.
Commercial Leases Are Rooted in Contract Law
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 business owner should expect that contract dispute to be litigated. When a commercial landlord claims a breach of contract has occurred, they will need to prove:
- That the contract existed
- Both parties had obligations under the contract
- How the opposing party breached the contract
- That the breach was material to the contract
- The damages caused by the breach
The business owner often has a defense to enforcement, or a good reason for why the owner’s liability should be limited. There may be misrepresentations by the landlord, or problems created by poor maintenance or property upkeep, that justify the termination. At this point, any tenant or business owner needs a business real estate attorney present to guide the tenant through the legal process.
Houston Real Estate Lawyers for Commercial Lease Agreements
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 lease negotiations facilitated by an experienced real estate lawyer, Texas business owners can navigate the complicated world of commercial leasing and be prepared for unexpected situations. If you or someone you know has questions about lease negotiation options, contact the Houston real estate lawyers at Burford Perry LLP today to learn more about how we can help.
