There are four methods to get out of a commercial lease. Three will keep you on good terms with your landlord, retain a good credit rating and keep your integrity intact, while one will not.
You signed a five year lease to open a retail store only to discover after two years sales are not what you had expected. Two years had passed as you continue subsidizing your business to cover expenses. You decide enough is enough and close the doors. However, you committed to a five year lease with three years remaining. You are contractually obligated for the remainder of the term, but have no funds available and walk away.There are four methods to get out of a commercial lease. Click To Tweet
The Deadbeat Way
Your first mistake was not communicating with your landlord at the first sign of trouble. Before taking any drastic measures be sure to always communicate with your landlord before you stop paying rent. There are several measures a landlord can take while you are still in good standing including finding a new tenant.
Unfortunately, in your discouragement and embarrassment you move out and “go underground.” After your landlord legally gains possession of the property she sues you for unpaid rent, rent incurred until the property is re-leased to a new tenant, the costs to prepare the property for the market (maintenance, trash disposal, cleaning, broker fees, advertising, etc.) and legal expenses at the minimum.
A judgment is awarded and of course you do not have the funds to pay so the landlord files liens and garnishes your wages. Your credit is negatively affected, you lost your integrity and tarnished your name. This is not the way you should had handled the situation.
Whether you close your business, decide to relocate, sell your business or even receive an offer from the tenant next door who wants your space there are alternatives. Many leases allow for an assignment and a sub-lease. Both of these methods require approval of the landlord. There are most likely additional terms within the lease that must be followed so be sure to review.
An assignment transfers the lease to a new tenant and relieves you of your obligation. The new tenant would likely need to qualify financially and show he is credit-worthy. Many times when a business is sold an assignment is executed transferring the lease to the new business owner.
A sub-lease allows you as a tenant to secure another tenant (called a sub-tenant) to take over the premises. You are still held liable under the lease and you continue paying the rent. In essence you become a sub-landlord and now collect rent from the sub-tenant. This method is often used when a tenant wants out of a lease and closes his business, but is oftentimes used if he has excess space and sub-leases a portion.
Finally, the fourth method of getting out of a lease is through a buyout. Essentially, the tenant makes a monetary offer and if accepted by the landlord executes a mutually agreed to cancellation of the lease.
As stated in the first paragraph, communication with the Landlord is essential. You never know what might be going and in some cases, it may be a win-win for the Landlord. But unless you communicate, you will never know what options you have to get out of a commercial lease, unless you ask.
Photo Credit: “Wooden Judge Gavel” by Kittisak Source: freedigitalphotos.net