Breaking up: How ending your lease before term can impact your business

The two most common reasons for terminating a commercial lease early are when the business outgrows the space or when business is severely reduced or going out of business. In either case, breaking a commercial lease can have severe consequences that can make a lasting impact on your business. 

A commercial lease is a contract with the landlord for the use of the property. It may contain few protections for the tenant when there are defects in the property, even when they prevent business operations or threaten the tenant’s business. Protections must be written into the lease stipulating who will make repairs, modifications, and what penalties apply if the lease is terminated early. When these terms are not part of the contract, you may find yourself at the landlord’s mercy.

What Can Happen When You Break a Lease Early

Landlord-Tenant law and eviction noticeRental laws vary from state to state and may be helpful to you if you need to break your lease early. Research the laws in your state and know them thoroughly before considering breaking your lease, preferably before signing a lease. If you have planned well, you may have an early termination clause in your lease that governs how and when you can break your commercial lease legally.

Your state may require your landlord to find another tenant to reduce his losses on the rent. You may be able to help your landlord find another tenant. However, this may not stop your landlord from taking legal action against you. If they do, you could find yourself adding expensive legal costs on top of penalties.

Logistical and Operational Costs of Breaking a Commercial Lease

Your lease is a legally binding contract, and you cannot simply walk away from it unless you have agreed with the landlord to terminate it early.  In addition to the rent and other leasing costs, you could have to pay:

  • Cost of advertising the property and finding a new lessee
  • Termination penalties
  • Clean-up costs
  • Legal costs if you do not reach an agreement with the landlord
  • Costs stipulated in your early termination clause

Can I Break a Commercial Lease Legally?

If you want to end a commercial lease, the first step is to read your commercial lease agreement. The agreement contains various clauses that can guide you on how to legally terminate your lease early.

Bailout Clause

A bailout clause or early termination clause allows you to get out of the lease if your sales fall below a certain threshold. It is especially relevant in retail where revenues may be volatile. It essentially ties your lease to the financial performance of your business, providing some protection against unforeseen downturns.

Co-tenancy Clause

A co-tenancy clause allows you to break your lease legally when an anchor tenant leaves, or occupancy drops below a preset level. This is based on the idea that the draw of a large anchor tenant brings in foot traffic which benefits all businesses in the complex. Therefore, if that tenant leaves, it could severely impact your business.

Lease Buyout

A lease buyout involves paying a lump sum to terminate the lease early. If you are in a popular area, your landlord may agree to a lease buyout if they believe they will be able to lease the space again quickly, especially if they can rent it at a higher rate.

Other reasons you can potentially break a commercial lease legally:

  • Your landlord breached an important lease provision
  • You are in bankruptcy
  • You and your landlord agree to terminate early. Enter into a deed of surrender to explicitly release you from all lease obligations
  • You have an early termination clause or break clause in the lease
  • You may be able to transfer or assign the lease with your landlord’s agreement
  • You may be able to sublet the property

Can a Landlord Break or Refuse to Renew a Commercial Lease?

Your lease agreement is legally binding under contract law, but it can be broken in some circumstances. If you and the landlord agree to break the lease, you should both sign an agreement to protect you from future legal action. Without your agreement, your landlord can legally break the lease in some circumstances:

  • The tenant does not pay the rent on-time
  • The tenant does not take care for the property or damages it
  • Tenant violates the terms of the commercial lease agreement

If your landlord is terminating your lease early without your consent, seek the advice of a lawyer experienced in contract law.

The Landlord and Tenant Act of 1954 provides you with “security of tenure.” This act provides you with the right to renew your lease when it expires. In most cases, your landlord will negotiate the terms of a new lease with you. The landlord can refuse to renew the commercial lease agreement under these situations:

  • The tenant has breached the contract
  • The landlord offers other, suitable property
  • When a sub-tenant is leasing part of the building, but the landlord wants to lease the entire building as a whole
  • The landlord plans to tear-down or rebuild the building 
  • The landlord plans to use the building himself

Before attempting to renew your commercial lease agreement, you should seek advice from an expert on commercial leases and the commercial real estate market. 

Can a Landlord Evict a Commercial Tenant?

A landlord can evict a commercial tenant for a variety of reasons. Much depends on your state laws and the terms of your lease. In general, your landlord can evict you if you violate the terms of your lease or fail to pay the rent. 

To evict a commercial tenant, the landlord must:

  • Provide notice of eviction to the tenant.
  • When the notice expires, the landlord can file a complaint in court and issue a summons to start the eviction process. 
  • The tenant must respond by the deadline on the summons. If they do not respond, the court will usually order the eviction.

Whether to break your lease is a serious decision that requires you to be fully informed of all the consequences. Consider getting advice from a legal expert on contract law and an experienced commercial real estate broker. If you had good advice before signing the lease, you should have an early termination clause that may protect you. 

Anne Barer

About Ro Crawford

Ro has extensive background in several sectors of the Real Estate industry including residential and commercial assets. Ro is responsible for developing a comprehensive marketing plan for each property as well as managing the company’s social media accounts. She designs, writes and edits offering memorandums, press releases, proposals for new business, eblasts and more. For questions, comments, or suggestions related to our blog, you can contact us via our website.