Lease Buyouts and Early Exits: Your Options

Companies leave leases early for ordinary reasons: the team shrank, the team grew, the company was acquired, the work moved to another city, or the office stopped being used. Whatever the reason, the options are the same, and the first question to ask of each is what you will still owe afterward.

• Termination right: a clause already in your lease that lets you end it early by giving notice and paying a stated fee. Your liability ends on the termination date.
• Negotiated buyout: an agreement with the landlord, reached now, to end the lease in exchange for a payment. Your liability ends when the agreement says it does.
• Assignment: you transfer the entire lease to another company, which becomes the tenant. You often remain liable behind the new tenant unless the landlord releases you.
• Sublease: another company occupies the space and pays you. You remain the tenant and stay fully liable to the landlord.

The routes are not exclusive. A common sequence is to market the space for sublease while opening a buyout conversation with the landlord, and to take whichever produces the better result first.

Check the lease and every amendment. A termination right, where one exists, is the most certain exit because the landlord has already agreed to it. The terms will be specific and unforgiving.

• ✓On what date, or after what point in the term, can the right be exercised?
• ✓How much notice is required, and in what form must it be delivered?
• ✓What is the termination fee, how is it calculated, and when is it due?
• ✓Must we be free of any default to exercise?
• ✓Is the right personal to the original tenant, or does it survive an assignment?
• ✓What condition must the space be in when we hand it back?

The fee is typically built to repay the landlord for what it spent on the deal and has not yet recovered through rent, such as the build-out, the free rent and the commissions, often with an additional amount of rent on top. Have your attorney confirm the calculation and the notice mechanics. A notice sent late or in the wrong form can void the right.

With no termination right, a buyout is a negotiation the landlord can decline. It will agree when ending your lease is worth more to it than keeping you. Understanding that calculation tells you whether a buyout is realistic and roughly what it will cost.

• Re-leasing prospects. If the landlord believes it can fill the space quickly, particularly at a higher rent, it has less to lose by letting you go.
• A tenant in waiting. A neighbor that wants to expand into your suite is the strongest position you can be in. The landlord may want the space back.
• Unrecovered costs. The landlord will want to be made whole for build-out, free rent and commissions it has not yet earned back.
• The cost of replacing you: a period of vacancy, new construction and new commissions.
• Your credit. A landlord that doubts a tenant can pay through the end of the term may prefer a certain payment today to an uncertain stream of rent.
• Its lender and its plans. Some owners need lender approval to end a lease. An owner preparing to sell may not want a new vacancy on the rent roll.

The payment is negotiable and is usually well short of the total remaining rent, because the landlord expects to lease the space to someone else. The deposit is part of the same conversation: whether it is returned, applied to the fee or kept.

Bringing the landlord a solution strengthens a buyout request. A replacement tenant ready to sign a direct lease can turn a firm no into a quick agreement.

An assignment hands your whole lease to another company for the rest of the term. It fits best when the company is being sold or when another business wants your space on your terms. Most leases require landlord consent. The key issue is the release: unless the landlord agrees in writing to release you, the original tenant commonly remains responsible if the new tenant defaults. Ask for the release, and expect the landlord to grant it only if the new tenant’s finances are at least as strong as yours.

A sublease is the route that needs the least from the landlord, usually only consent, which is why it is often the fallback. It is also the weakest exit. You keep the lease, the liability and the administrative work, and you typically recover only part of your cost.

Use the difference deliberately. If ending liability matters most, for example before a sale of the company or a wind-down, pursue a termination, a buyout or an assignment with a release. If reducing monthly cost matters most and you can live with the continuing obligation, a sublease may be enough.

Many early exits are not exits from the landlord at all. A tenant with too much space, or too little, can often trade its existing lease for a new one on different space in the same building or elsewhere in the same owner’s portfolio. The landlord keeps a tenant and gets a fresh lease. The tenant leaves the old obligation behind without a buyout payment, or with a much smaller one.

That outcome, for a software design firm, came from looking at every option first, including coworking and space in other buildings. The alternatives are what gave the landlord a reason to offer a better arrangement.

1. Read the lease for a termination right and for the sublease and assignment terms.
2. Calculate your remaining obligation: rent, operating expenses, restoration costs and any guarantee.
3. Assess how marketable the space is, to a direct tenant and to a subtenant.
4. Find out what the landlord needs: other tenants seeking space, vacancy in the building, plans to sell.
5. Estimate the net cost of each route, including fees and the time each will take.
6. Pursue the best route, with a second route running in parallel as leverage and as a fallback.
7. Put the result in a written agreement prepared or reviewed by your attorney.

The termination agreement deserves care. It should state the date the lease ends, the payment and when it is made, the condition in which the space must be returned, what happens to the deposit or letter of credit, and a release of each party’s obligations, including any guarantee. Ask your CPA how a termination payment should be treated for tax and accounting purposes.

Evaluating and negotiating these exits is part of the work TAG does for technology, software and data companies whose space needs have changed.