Sunday, May 13, 2018

How to Get Out of a Commercial Real Estate Lease

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get out of commercial lease downtown austinWhen signing a commercial real estate lease (office space, retail space, warehouse space) you are typically committing to either 3 year, 5 year, or sometimes longer lease contract and you are legally obligated to fulfill the entire obligation regardless of whether or not your business succeeds or fails.  You have the best intentions to create a successful business however sometimes things just don’t go your way. For example when searching for warehouse space for rent in Austin Tx expect to sign at least a 3-5 year lease.

If you find yourself in a situation where you need to close your business however still have lease term left on the lease there are some ways you can get out of your commercial real estate lease.  3 of these options will keep your good credit in tact, however one option will not.

Sublease

Most lease contracts have a sublease clause which allows you (the tenant) to find another tenant to sublease from you.  If you don’t have one make sure you get it included.  Essentially you become a sub-landlord and collect rent from the subtenant, however you are still liable to the building owner for rent payments and any damages to the space that may occur.  Subleases require landlord approval which they cannot unreasonably withhold as long as the subtenant is similar to your business and they have financials as good or better than yours.  You can also sublease a portion of your space if needed.

Assignment

In some cases the landlord may allow you to assign your lease to another company, thus removing you from any liability or obligations.  Commercial lease assignments can occur in many situations such as:  1.  you sell your company, 2. landlord realizes they can get higher rents if you move out so they release you of obligation, 3. tenant next door buys you out of your lease, etc.  Again assignments can release you of all obligations, however in most cases the landlord will want the new entity to have as good or better financials than you.

Lease Buyout

Lease buyouts are possible as long as you can come up with terms and conditions that entice the landlord.  The landlord does not have to agree to a buyout however depending on the market, terms, and conditions you may be able to get them to agree to one.  In a lease buyout you would typically offer to pay a lump sum (% of remaining costs) equal to one or more of the following:  1. certain number of months of rent and expenses, 2. unamortized cost of tenant improvements, 3. unamortized cost of commissions, 4. additional months of rent to give landlord time to lease out the space again, etc.

Move Out in the Middle of the Night

This is the last thing you want to do however I have seen tenants do it.  They simply file or bankruptcy and move out in the middle of the night.  If the stakes are high landlords will do everything in their power to sue you for one or more of the following: 1. rent that has not been paid, 2. legal expenses, 3. cost to prepare space for re-letting 4. commissions, 5. rent not received while marketing space for new tenant, 6. advertising, etc.  If you signed a personal guarantee then the landlord can go after you personally for damages.  This is not how you want to get out of a commercial real estate lease!

Conclusion

Overall you need to communicate with your landlord.  If you realize things are not going great then try to work out something with the landlord or property manager.  No communication is the first sign of trouble!  You will be surprised to find that some landlords will help you out anyway they can.  Others may not be so flexible.  Try to avoid tarnishing your name and company name do things the responsible way.

 

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