How to Get Out of a Commercial Lease
There are times when a business must close in a location. This is usually because it is losing money at the location and the business can no longer service the lease without jeopardizing the company as a whole. There may be other reasons for closing such as the trade area changing demographically or a major tenant leaving the center.
Whatever the reason, this is a business problem; not a personal failure. Treat it as just another challenge to be overcome.
To learn how to get out of a commercial lease consider the following.
What Do You Want?
Closing is often the obvious solution but not necessarily the right solution. Each case is different. Before embarking on termination discussion with the landlord you should be sure you have considered the options you may have. If the location is in a very busy center and demand for space is high, you may have an asset to be sold rather than given back to the landlord. If there are a lot of vacancies you should be prepared to have to pay to terminate early. If you are moving to get into a larger space or different area there may be ways to enlist the landlord's support. If the reason is a personal health issue or other family pressure it is as important to understand this need as thoroughly as a business driven need.
The reason for the change will provide insights into what your options are. To negotiate or get out of a commercial lease you have find a way to get the landlord to agree. The last resort is to simply pay your way out or, worse, default and turn control over to the landlord.
Quantify the Benefit to You
The benefit to you is important because when you get out of a commercial lease early you will likely have to compensate the landlord to do so. That means you should quantify the value to you to leave early so you don't agree to pay more than the value you are getting.
If you are relocating to another location the difference between the net profit of the new location and the net profit or loss of the current location is one way of looking at the benefit to you. Another would be to assess the additional time you would have to handle a personal situation, go back to school for an advanced degree, or other less tangible benefit. Whatever the benefit you need to try to put a value on it so you can measure the cost of getting out of the lease against the benefit to you.
Identify The Impact on the Landlord
As with most things in life, when there is a benefit there is a cost; when something goes up something else comes down; the Ying and Yang thing. The benefits of getting out of a commercial lease will likely be offset by the inconvenience or cost to the landlord to re-
let your space.
Understanding the cost to the landlord will help you assess if his termination terms are fair or egregious. The landlord will have to absorb the loss of rent until he gets the new tenant paying rent. This includes the time to find a tenant, sign the lease then any free rent the new tenant requires to convert the space. The landlord will also have a real estate commission to pay and legal fees for preparing the lease. Then there is the rent he will be getting as compared to what you are paying. If less, that is a further cost but if
the new rent is higher, then he will have an offsetting benefit.
What Will the Landlord Do with the Property
In preparing to sit down with the landlord to negotiate an early lease termination you should canvass the market to understand the likely redeployment strategy of the landlord and projected results. One way to address this problem is to assess why you failed in the location if that is the case. The reasons for your problems may relate to the center or the trade area and, if so, will probably cause the landlord to change the use of the space to make it more viable.
This is a great time to pay a consultant or broker to assess the trade area and give you an opinion of the highest and best use for your specific space within the trade area. Along with that opinion the brokers should be able to estimate how long it will take the landlord to find a new tenant and the estimated terms of the new lease. This information obviously helps you in your negotiations and is worth the cost to assemble a package to share with the landlord at the right time.
Unless you want to pay a lot of money to get out of a commercial lease you need to identify other ways to motivate or compensate the landlord. For example, if you are moving to get into a larger space or different area consider asking the landlord if he has other centers in the area to which you want to relocate or other spaces in the existing center to better fit your needs. Trading locations may meet both of your needs. Another option might be to find someone to take over your business and the lease. Offering a replacement tenant is obviously far better than a vacancy!
As with any negotiation communication is critical. You should be prepared to state your case clearly and concisely and provide documentation to back up what you say. If you are claiming to be losing money at the location, bring operating statements or tax returns that show your loses. It is your job to convince the landlord to help you. Facts always help in establishing the legitimacy of your case.
Sit Down with the Landlord
Getting out of a commercial lease will not be easy unless your rent is way under market. The best strategy is to meet with a decision maker to make your case directly. How the person initially reacts will provide valuable insight into how you will want to refine your actual proposal to terminate. The first meeting should be just to broach the subject of an early termination and gauge how the landlord reacts and develop options that may offset any financial compensation need to achieve your objective. Be prepared to have several
meetings with the landlord each time trying to learn best how to advance you cause. The
time you spend should yield real dollar savings in the final analysis.
If you don't have the time to do this yourself or if there is another reason consider hiring an advocate to do this for you. There are many different types of professionals who do this time of work ranging from commercial real estate brokers to financial advisors to attorneys. They can be hired to advise you on how to approach the landlord or actually do the negotiating.