How to Break a Lease the Right Way


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Long term leases, if done properly are made with options to be broken. Whether the landlord is looking to get the current tenant out in order to charge more to a new tenant or more likely, the tenant is looking to get out to find the right sized space, there are many times in commercial real estate when the usefulness of the lease has run its course before the term has ended. As the tenant, there are measures that can be taken to protect yourself before signing the lease so that during the lease term you maintain some flexibility.

Before Signing

Show the lease to your attorney

Be sure that someone with a legally trained eye gets a look at your lease before signing it. There are often a vast array of subtleties within the lease that can lock you in unnecessarily. These problems can be avoided with some foresight and by having your attorney dive into the details before making such a large decision.

Flexible termination clause

Through the negotiation process, find a way to work an exit strategy into the lease. One of the most overlooked and yet critical aspects of negotiating a lease is making sure there is a termination option. This is especially critical for leases longer than five years. A right to terminate will not be offered voluntarily by your landlord, rather, it is something your broker will need to establish before singing.

During the Lease

Keep record of all issues

Throughout the life of the lease, take a note of every problem that comes up, no matter how small or trivial it may seem. For instance, if a light bulb goes out, and it took maintenance two days to fix it, take record of this as it could certainly be used for leverage. There is no need to go out of your way to search for problems, but having a summary of anything that your landlord has done (or not done) to make the space uncomfortable will give you leverage if there is ever a need to get out of your lease.

Sublease

One way to mitigate the rental liability is to sublease your office to another tenant. With leases signed in the last five years, the rates those tenants are paying is often times lower than current market rates, making a sublease much more attractive to a prospective subtenant. Depending on the situation, there is even the possibility of making some money on this.

Last Resort

Have your broker approach the landlord

A broker will always have a greater understanding of how to build leverage. A broker can really negotiate from a strong point of leverage when they have a strong back up plan or BATNA (Best Alternative to No Agreement). For instance; there could be other tenants in the building that have been wanting to expand their space or move from one office to another in the building. The broker will be able to use this as leverage to break the lease smoothly.

Back-end loading

Should all else fail, there is the option of trying to back-end load the lease. What this means is that the broker would negotiate a reduced rate for a certain period of time (for example a year), which would then be added to the following year or later in the lease. This is not an ideal option for the landlord as it will be less revenue now on a financially at risk tenant. However, should you happen to have a strong broker on your side, this can certainly be negotiated.

 

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