Leaving a Lease to Buy a Building

Before you make an offer on a building, read your current lease with one question in mind: what does it cost to leave, and when? Have your attorney confirm the answers, since the details differ by lease and by state.

• ✓What is the exact expiration date, and does any renewal happen automatically unless we give notice?
• ✓Is there a termination option, with what notice deadline and what fee?
• ✓What does the lease require for a sublease or assignment, and what standard applies to the landlord’s consent?
• ✓Can the landlord recapture the space or share in sublease profits?
• ✓What restoration or surrender work must be finished, and by when?
• ✓Is there a personal or corporate guaranty, and does it survive a transfer?
• ✓What does the holdover clause charge if we stay late?

The simplest exit is letting the lease run out. That works only if the purchase, any renovation and the move all finish before expiration. They have to be scheduled backward from that date, and every step on the purchase side can slip: reports, title work, loan approval and construction.

Your exposure runs in both directions. Close too early and you pay for two places at once. Close too late and you may be holding over, possibly at a premium rate, while your new building is not ready.

Do not give up your current space until the purchase is secure. Giving notice or signing a buyout before closing can leave you with no space at all if the loan or the deal falls apart.

Some overlap can be worthwhile insurance. A few months of paying for both may cost less than an emergency move. If renewing is the alternative to a holdover, ask for a short written extension rather than relying on a verbal understanding.

• Termination option. If your lease has one, it gives you a defined price and date. Check the notice deadline first, because missing it can eliminate the right.
• Buyout. You negotiate a payment for the landlord to release you. It ends the obligation cleanly if documented properly, but the landlord does not have to agree, and the price depends on its alternatives for the space.
• Sublease. You rent all or part of the space to a subtenant. According to Barton LLP, the original relationship stays intact and you remain liable for your obligations, including rent. You also take on the risk that the subtenant fails.
• Assignment. The assignee takes over your lease and deals directly with the landlord. Barton LLP warns that absent an express release from the landlord, the original tenant and any guarantors will typically remain liable. Ask for that release.

Subleases and assignments usually have restrictions. Barton LLP lists common ones: financial review of the new party, landlord fees, a right to recapture the premises, profit splitting and a written consent requirement. It also notes that if a lease requires consent with no limiting language, the landlord may withhold it for any reason, and that a "not unreasonably withheld" standard narrows this. Read any recapture clause closely, since it can change the outcome of a sublease you were counting on.

There is a fifth route some tenants overlook: buying from your own landlord. It removes the exit problem altogether, provided the current space works for the long term. One dental practice owner described how the idea came up:

Here is a hypothetical, for illustration. These figures are invented and are not market data. A company closes on its building with 10 months left on a lease at $25,000 a month. Its remaining rent is $250,000.

• Stay and pay: $250,000, with the space sitting unused, and no transfer risk.
• Sublease: the space sits empty for two months, then a subtenant pays $15,000 a month for the last eight. That brings in $120,000. With $20,000 of commission and other costs, the net cost is $250,000 minus $120,000 plus $20,000, or $150,000. The company stays liable if the subtenant stops paying.
• Buyout: the landlord accepts $120,000 for a full release. The cost is known, and liability ends.

In this example the buyout beats the sublease by $30,000 and removes the risk. Change the inputs and the answer changes, especially if the remaining term is long and space is easy to fill. Also remember restoration costs, which may apply on any route, and the tax and accounting treatment of an early exit, which your CPA should review.

Some owners assume they can stop paying and let the landlord re-rent the space. That can be an expensive assumption, and a default can trigger remedies under the lease, along with consequences for any guarantor. Discuss it with an attorney before you do anything of the kind.

Illinois law shows why the assumption is risky. The Illinois statute at 735 ILCS 5/9-213.1 says a landlord shall take reasonable measures to mitigate damages recoverable against a defaulting lessee. But Buchalter’s review of Illinois cases explains that the question of what is reasonable is decided case by case, that a court has held the duty can be contractually waived by a commercial tenant, and that a landlord has no duty to mitigate until it comes into possession. Rules differ by state, and your lease may have its own wording.

1. Before making an offer, have your attorney summarize your lease exit rights, costs and deadlines.
2. Build a timeline backward from expiration, or from your target exit, that includes reports, loan approval, renovation and the move.
3. In the purchase agreement, negotiate closing dates and conditions that match that timeline, including delivery of a vacant building if you need it.
4. Price every available exit route, including the cost of simply overlapping.
5. Open any buyout discussion with the landlord only when you are comfortable with it knowing your plans, since that knowledge can change the conversation.
6. Sign any exit only after the purchase is secure, or make it conditional on closing if the landlord will agree.
7. Get the release in a signed document that covers guarantors, restoration and the security deposit.

Tenant Advisory Group represents tenants and buyers, so we can look at the lease exit and the purchase as one timeline, price the sublease and buyout routes, and help you negotiate with your landlord while your attorney handles the documents.