A commercial lease is similar to a residential lease in that it involves a contract with a landlord for the use of a piece of property. It is different from a residential lease in that the lease allows the property to be used primarily for a business purpose approved by the landlord. Commercial leases are used to rent office, retail or warehouse spaces, for example.
Commercial leases may contain less consumer protections than you might find in a residential lease. For example, there may be less protection for the commercial tenant when there are defects or repairs even if they threaten the continuation of the tenant’s business.
Therefore, it is important that you pay attention to the different provisions of the lease, which will address things like lease term, rent, modifications, duty to repair, and disputes. The lease also will describe what spaces are included as part of the rented property — such as parking spaces and common areas — and will discuss whether alterations can be made to the building.
Commercial leases are usually for years-long terms and will restrict the business from engaging in behavior that may negatively impact the landlord’s other tenants who may share adjacent space. The lease will also include the conditions under which the lease may be terminated and what penalties may be awarded for improperly terminating the lease.
- Can the Lease be Terminated if the Business is Unable to Pay the Rent?
- Can the Business Terminate the Commercial Lease Early?
- What Types of Liability Can I Face if I Terminate the Lease Early?
- Are There Circumstances Under Which I Can Terminate the Commercial Lease Early Without Liability?
- Should I Consult with an Attorney if I Want to Terminate My Commercial Lease Early?
Landlords are in the business of making money so businesses are typically unable to terminate a lease even when the business is unable to pay the rent. Conversely, a landlord can terminate a lease when it can show that the business is unable to continue paying rent as required under the lease. The lease will identify what penalties the landlord may seek against the business for failing to continue paying rent.
Commercial leases, like residential leases, do not usually provide for the tenant to be able to terminate the lease without serious consequences. Remember, commercial leases can be years long. Even if the business fails during the term of the lease, the business may still be required to meet the terms of the lease.
In order to be able to terminate a commercial lease early, it is likely the business would have had to have negotiated this as part of the original lease and been required to include a financial incentive to the landlord to include this provision in the lease.
When a commercial lease is terminated early and the contract does not permit early termination, the breaching party may be liable to the non-breaching party. The non-breaching party may be able to seek monetary damages.
For example, the commercial lease may include a liquidated damages clause that expressly states the specific amount of money the non-breaching party may receive, or how such amount should be calculated. The commercial lease also may provide for punitive damages to the extent allowed by the law that governs the lease.
Your ability to pay rent may rise and fall on how successful your business is. It is, therefore, important that you anticipate this by carefully negotiating for terms that will offer you the greatest protection in the event your business does fail.
As indicated above, you can sometimes address this uncertainty by including a provision in the contract that addresses termination without liability, which will usually involve a steep deposit.
Otherwise, you may be able to terminate a commercial lease without liability if the lease provides for the following:
- Break Clause: A break clause is typically a one-time opportunity that is triggered by a specific date or event where either the landlord or the tenant may terminate the lease early without liability. There are usually preconditions to be met including notice, payment of all rent due, vacation of the premises, and compliance with the other provisions in the lease;
- Assignment or Sublease: An assignment or sublease is when a party transfers all or part of the interest in a leased property to another party before the original lease expires. An assignment or sublease is only allowed if permitted in the commercial lease;
- Breach: If one party commits a material breach under the commercial lease, the other party may be entitled to terminate the lease without any penalties; or
- Modification: The landlord and tenant can agree to modify the terms of the commercial lease to address a change in circumstances.
Commercial leases are heavily negotiated because there is no one-size-fits all when it comes to business. While every business owner expects to succeed, circumstances can always arise that impact the business and the owner’s ability to continue paying rent.
Therefore, it is important that as a tenant you consult with a real estate attorney in your state who can help you protect yourself before you enter into a commercial lease. If you already have entered into a commercial lease and you are involved in a dispute, the attorney can also help you respond vigorously to preserve your rights and interests.