In legal terms a lease is an agreement, often written, in which the owner of a piece of property allows the use of the property to another party for a specified period of time in exchange for periodic payments. A commercial lease involves a written contract with a landlord for the use of a piece of commercial property. Commercial property is property that may be used for a business purpose, such as an office space, warehouse space, or even a used car dealership.
Commercial lease contracts are usually lengthy contracts that outline terms such as:
- Both parties’ obligations;
- The use of the commercial property;
- The total length of the lease term;
- Amount and frequency of rental payments; and
- Clauses regarding how disputes are to be handled.
Many business owners renting commercial property spaces often find themselves in a situation where their business is failing, but they are still liable under their commercial lease contract for rental payments through the end of the release term. Often commercial lease contracts will include the conditions under which the commercial lease may be terminated, and the penalties that may result from an early termination of the lease. Thus, it is important that you carefully review a commercial lease before entering into an agreement of any length.
Further, it is important to understand the difference between terminating or breaking a lease and terminating a lease without penalty. First, commercial leases are grounded in contract law, which means that when you break or terminate a lease, you may be found to have breached your obligations under the contract. However, commercial lease contracts typically allow for the commercial lease to be terminated without penalty in specific situations.
For example, the contract may allow for the lease to be terminated early with advanced notice, such as 30 or 60 days notice. Additionally, it is important that you review your state’s laws on commercial contracts, as the owner of the commercial property may have a legal duty to mitigate their damages. An example of mitigating damages would be the property owner having to search for a new tenant once proper notice has been given to them.
Can a Lease Be Terminated if the Business Cannot Pay Rent?
Once again, it is important that you fully understand the terms of your specific lease agreements. Typically, commercial leases may not be terminated simply because the renter is unable to pay rent. On the other hand, some commercial lease agreements do in fact allow for a lease to be terminated in situations where the business owner is unable to pay rent. The termination clauses in commercial leases may also be very specific regarding the reason for the lease termination.
For example, some leases may only allow for a business owner to terminate the lease in situations where their inability to pay rent is not a result of direct actions they took, but rather as a result of outside forces. For example, if their business is forced to shut down due to an “act of god,” the commercial lessee may be terminated their lease.
Additionally, commercial leases often require the renter, the landlord, or in most cases both parties, to carry different types of insurance. Some commercial insurance policies may cover the landlord or tenant in the case of an inability to pay rent. Additionally, in some commercial leases, the security deposit made by the tenant may cover the cost of early termination.
For instance, if the renter terminates the lease early due to an inability to pay rent, the contract may release them of their liability to pay the remainder of the rent owed by the contract, but the landlord would keep their initial security deposit. Once again, it is important to review the security deposit and insurance sections of your commercial lease contract.
What are the Consequences If I Terminate My Commercial Lease Early?
As mentioned above, terminating a commercial lease early will often result in you having to pay the penalties outlined in the contract. Typical penalties for terminating a commercial lease early include, but are not limited to the following:
- Paying the remainder of the rent still owed on the lease in full;
- Paying a specified amount of liquidated damages as outlined in the contract terms;
- Paying an additional amount of punitive damages, dependent on local state laws; and/or
- Having to undergo a form of alternative dispute resolution, such as mediation or arbitration.
Once again, the penalties for terminating a commercial lease early will often be discussed in the contract. Thus, it is important to fully understand the risks of entering a long term commercial lease contract, before signing the contract.
Can I Terminate My Commercial Lease Early Without Penalties or Liability?
As noted above, your specific commercial lease contract will often contain provisions where the lease may be terminated by either party, the tenant or the landlord, in certain situations. For example, in a case where the commercial property is struck by lightning and burns down, both parties will often be released from their obligations under the terms of the commercial lease contract without penalty.
Another common way to terminate a commercial lease early without penalty is by written agreement. Communication between a landlord and tenant is fundamental in commercial lease situations, as often the landlord will be responsible for maintaining the functionality of the commercial space.
If a tenant and landlord have a good working relation, often a landlord will understand when a tenant is unable to continue the lease and allow them to terminate the lease early with proper notice, without any sort of penalty. Entering into an early lease termination agreement is also a good deal for the landlord, because it is better for them to arrive at a mutually beneficial solution then having to pay legal fees in order to obtain and collect a judgment. Additionally, they do not have to worry about you filing bankruptcy.
Further, some commercial lease contracts allow the renting party the ability to assign or sublease the contract. A sublease or assignment occurs when the commercial tenant transfers all or part of their interest in the property to another party during the lease term. However, assignments and subleases are typically only allowed if they are specifically permitted in the commercial lease.
If assignment or subletting is allowed, a commercial tenant may be able to locate another party to take over their lease, without penalty. It is important to remember however, that the landlord may still be able to come after the original tenant if the sublessor fails to make the payments specified under the original contract.
Can a Landlord Break a Commercial Lease?
Once again, the specific terms of the contract will control whether a landlord is allowed to break a commercial lease. If the landlord unilaterally breaks the commercial lease, the tenant will be able to seek compensation for that breach. When a landlord breaches the commercial lease, a tenant may recover damages from the landlord, including:
- The total amount of economic losses they suffered as a result of not being able to utilize the commercial property;
- The cost of having to find and secure another suitable property; and/or
- The attorney fees necessary to prosecute their claim against the landlord.
Do I Need a Lawyer If I Want to Break a Commercial Lease Early?
As can be seen, commercial leases are often lengthy contracts that involve numerous different clauses that dictate the responsibilities and obligations of the parties subject to the contract. Therefore, if you are in a situation in which you need to break a commercial lease early, it is in your best interests to consult with a well qualified and knowledgeable real estate attorney near you.
An experienced real estate attorney will be able to determine whether your commercial lease contract allows you to break the lease early without penalty. Additionally, an attorney will be able to help you fully understand your legal options under the term of your contract. Finally, an attorney can file any necessary legal paperwork on your behalf, and represent you in a court of law, if necessary.