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3 solutions when a commercial tenant wants to break a lease

On Behalf of | Jul 1, 2024 | Real estate

Commercial leases are usually long-term agreements between a business and a landlord. They agreed to specific terms regarding maintenance and monthly rent that may last for anywhere from two to five years, sometimes more.

There is a bit of optimism involved in the lease negotiation process. After all, many new businesses fail. Landlords and business owners alike gamble on the future success of the business tenants. If the company fails or becomes insolvent before the lease ends, there may be questions about what happens next.

How can a landlord and tenant address the remaining months of a commercial lease when the tenant wants to terminate their lease early?

By invoking a force majeure clause

There are special terms that tenants can request in a commercial lease that give them a degree of protection. A force majeure clause does not always protect a tenant from responsibility. Instead, it only takes effect in scenarios where circumstances outside of the tenant’s control have affected their ability to continue operating the business. Natural disasters or supply chain disruptions are examples of situations that might let a tenant end a lease early if they have a force majeure clause in their commercial lease.

By assigning the lease to someone else

Most scenarios where tenants no longer need a commercial space do not meet the necessary standards for force majeure clauses. There could potentially still be several years left on the lease. Landlords can demand payment for that amount even in a business dissolution scenario.

Provided that the lease does not explicitly prohibit doing so, the tenant could seek out a replacement tenant. By finding another business or entrepreneur willing to assume their lease, they can ensure that the landlord does not take any losses. Their search to find the tenant means the landlord doesn’t have to pay to market the unit. Lining up a new tenant usually means that there aren’t any months of missed rent or minimal gaps between tendencies.

By negotiating a settlement

Theoretically, if there are still two full years left on a commercial lease, the tenant owes the landlord all 24 months of rent even if they intend to vacate the premises. Particularly in scenarios where a business has become insolvent, continuing to pay a commercial lease for months may not be realistic or even feasible. The landlord may agree to a compromise in which the tenant pays a portion of the rent owed in exchange for the elimination of the remaining balance due.

Both landlords and commercial tenants may need help in complex situations involving commercial leases. Securing the assistance of a legal professional can help people negotiate more favorable lease terms before signing documents and leverage existing lease terms when seeking to terminate or modify a lease.