Whether you have a successful or struggling business, you may find yourself looking to get out of your lease. Your reasons may vary and include anything from needing a different space to requiring a geographical change, from struggling to meet your current rent to discovering that your landlord is more trouble than he or she is worth. In any case, when you’re wondering how to get out of a commercial lease, it pays to know your options — and one of the most important is a commercial lease buyout.
In this post, we’ll describe seven things for you to consider when thinking about a buyout, including what a commercial lease buyout agreement is and how it works, what you’ll need to consider when negotiating out of a commercial lease, and other lease-related options.
The Commercial Lease Buyout Process Explained
In short, a commercial lease buyout involves having a tenant pay a landlord a certain pre-agreed-upon sum of money to quit the lease early. Sometimes a buyout may be governed by language written in the lease. For instance, a commercial lease buyout clause example might say something such as, “Lessee will have the right after the first (1st) lease year to buyout the Lease upon Ninety (90) days written notice and payment of One-Hundred Thousand Dollars ($100,000.00) to Lessor. Lessee will continue to pay rent and operating expenses until the 180-day notice expires.” Additionally, a lessee may need to continue to pay certain operating or capital expenses.
However, for many commercial and apartment lease buyouts, you will need to negotiate directly with your landlord. We’ll discuss more of the details in the “Negotiating a Buyout Amount” section below. Suffice it to say, though, that a negotiated buyout amount will depend on multiple factors, many of which remain beyond your control.
Commercial Lease Agreement and Provisions
Some of the reason why you might be considering buying out your lease could have to do with unalterable language within your lease. If you’re currently in the middle of a lease, there’s not a lot you can do to alter it, but it’s still wise for you to consider some potential problem points that may crop up the next time you have to sign on the dotted line. These include:
- Common Area Maintenance terms. Often abbreviated as CAM, these terms determine how much you’ll pay for basic building upkeep. Unfavorable CAM terms might put you on the hook for a landlord’s marketing costs or steeply increase what you pay if the building isn’t fully rented.
- The impact of Triple-Net Leases on expenses. One common kind of lease is a triple-net lease, which requires tenants to pay for taxes, insurance, and CAM. Though this seems simple enough, but if the building is located in an area that requires flood or wind insurance, you can experience unforeseen spikes in expenses if rates shift.
- Responsibility for capital expenditures. If the HVAC breaks down in the middle of summer or your floor develops a divot due to a fissured foundation, you may assume that your landlord is responsible to replace them. However, terms relating to capital expenditures may put tenants on the hook.
- Lease assignability / subletting. We’ll discuss this more in the “Options to Break a Commercial Lease” section, but know that you’ll have fewer options to escape your lease if you can’t assign or sublet it.
Penalties and Fees
While almost everything is negotiable in business, part of your landlord lease buyout may involve you having to pay certain fees. Breaking your lease may leave you contractually obligated to pay some sort of termination fee, and that won’t change unless you get the lease amended. Also, don’t think you can simply abandon the property and escape the financial implications. Many landlords require tenants to personally guarantee their leases. Lease language always impacts the early termination of commercial leases, and you should consider having an attorney review your agreement to search out any potential pitfalls.
Negotiating a Buyout Amount
Whether you have a lease early termination clause or your agreement remains silent on the matter, you’ll need to ask your landlord for a buyout. Now if you have a lease clause for early termination, the process will simply unfold as mutually agreed upon at signing. If you don’t, though, you’ll need to negotiate. The questions of “when” and “how much” will depend not only on your negotiating prowess, but also on timing and market factors such as:
- The remaining time on your lease
- Any deferred maintenance or scheduled upkeep
- Comparable area rents
- The state of the broader economy
As a rule of thumb, a strong economy can see you buyout your lease for half of its remaining value, but a weak economy may result in a buyout amount that’s scarcely less the total remaining sum.
Long-term Effects on Your Business in Staying vs Leaving Your Location
Any sort of lease buyout analysis will need to consider the consequences of remaining in your current location and then compare them the value of the lease buyout sum. Some of the factors you might consider could include:
- The expected growth of your business. If you expected rapid growth, it would make sense to buyout your lease and stick with shorter-term agreements for the foreseeable future.
- The opportunity costs of staying or moving. Not every expense is monetary, and failing to take advantage of potential opportunities can hurt in unexpected ways. Employing the ancient practice of premeditatio malorum should be an integral part of your decision making.
- Examine your subletting options. We’ll discuss this further below, but knowing whether you can sublet your current leased property or rent a space from a subletter somewhere else is essential.
Options to Break a Commercial Lease
If a commercial or apartment lease buyout doesn’t seem attractive, you have three additional options you can pursue depending on your lease language. You might:
- Sublease your space to another tenant
- Assign the lease to another tenant
- License the use of a part of your leased premises to a third party
There’s one final way to break your lease, but it’s not enjoyable to implement in practice. It involves legally demonstrating at least one of the following:
- A failure on behalf of the landlord to maintain the property
- The landlord harassing tenant or illegally entering the property
- Illegal apartments being run on the premises
Other Factors to Consider with a Commercial Lease Buyout
One final factor to consider buying out a lease apartment or business is availability. If you do commit to a buyout, are you certain that you’ll be able to find a new home for your operations? With GNP Realty, you don’t have to wonder. For years, we have helped lease, sell, and manage commercial properties throughout Chicago and the Chicagoland area. We combine an innovative, problem-solving approach with a total commitment to honest representation of our clients’ interests. Contact or call us at (312) 329-8400 to learn more!