As a business, there are many reasons why you may need to terminate your commercial lease early.  For example, maybe the business has grown or maybe the only viable option is to stop business.  Maybe the market has changed or pandemic has caused a collapse in demand.

No matter why you end your lease early, it is likely to be a matter of negotiation with your landlord, who will be counting on your continued lease payments to satisfy their own loans.

Landlords do not want the time-consuming and costs associated with finding a new tenant. Empty space means lost revenue, as well. For these reasons, landlords usually insist that there be language spelling out stiff penalties for breaking a lease early. The liability for quitting a lease early is usually the remainder of the lease. That is, the cost of every remaining month rent added up. The exception is if there is a plan for early termination in the lease.

Commercial leases extend for a specific period of time. Most leases are for five years and include an option to extend another five years, but in some cases, leases can extend for 25 years or more. Under a fixed-term lease, you will be responsible for the lease for each and every month, even if you go out of business.

Get an early termination clause written into the lease.

It is advisable for tenants to get an early termination clause put in the lease, though landlords will be resistant to any provision for early termination that gets them less than the full expectancy under a lease fully paid for by a tenant. Even if a landlord does consent to
early termination, their lender may not allow early termination of a lease.

If you are a tenant you should allow certain restrictions on when the early termination clause may be invoked. You may have to fulfill a certain period of time before the early termination clause opens. Usually, there is also a termination fee that can sometimes meet or exceed the amount of the deposit. The landlord may also require that you cover reletting expenses such as marketing or even repairs to the space.

Remember to ask these questions at the outset when you are reviewing your lease:

  • Is the landlord or the tenant able to find a new tenant if the agreement ends early?
  • Does the landlord have unlimited authority to accept or reject an assignee?
  • What is the fee or damages for ending the lease early?
  • Does the lease include a recapture clause?

Minimize liability for early termination of a commercial lease.

When ending a lease early, you will likely face some kind of liability. If a tenant stops fulfilling the terms of a lease before it expires and there is no provision for the early termination of the lease, the tenant is in breach of contract. After a breach, a landlord may sue a commercial tenant for damages or money. It is difficult to predict the harm caused by a broken lease, which is the reason why leases include flat fees or penalties.  It is often far more desirable to pay a flat fee known ahead of time than paying for all the damage a breach causes.

Tenants should look out for an acceleration clause, which requires a breaching tenant to pay the entire amount due under the lease as if it were fulfilled. In addition to outstanding rent, the leaving tenant may have to pay a percentage of the rent due.

Sometimes a tenant may be able to prove that the landlord failed to mitigate their damages by finding another tenant. Given how unpredictable the market can be, this should only be relied on as Plan B. If a landlord tries and fails to find a replacement tenant, the tenant is liable.

Unfortunately, the likelihood of facing an unfavorable judgment is high if you do not hire a lawyer to assist you with the early exit from a commercial lease. It will save you time and money in the long run to hire one.

If you need help interpreting a commercial lease or exiting a commercial lease early, you should contact attorney Kainoa Tabar on the “Make inquiry” button below. Attorney Tabar has over a decade of legal experience in handling contracts in real estate, business, and construction law.