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When it comes to getting out of a commercial lease — something that could become more relevant in a recession — there aren’t a lot of options. But that doesn’t mean it’s impossible. Not does it have to be incredibly difficult.
So says Hunter Norton, a partner with the law firm Shumaker.
“It’s always going to be dependent on the lease,” says the Sarasota business litigation attorney. “You’re going to need to look at the lease itself and see if in the lease there’s anything that’s to give the tenant the right to terminate.”
Commercial leases, for the most part, are written in a way that slants in favor of the landlords, with built-in provisions to make them difficult to break.
But that’s not always the case.
There are times when a lease “becomes impossible to perform,” Norton says.
For example, a tenant has a lease in place that only allows them to operate a pet store. If something were to happen to change the owner’s ability to operate, say a county ordinance is passed banning the sale of animals, the tenant would have a legal argument called “impossibility of performance” because, as the term implies, there is no way to continue operating. As such, they have a way out of the lease.
The problem with that approach is most landlords are smart enough to know the risk and are unlikely to restrict a leaseholder to a single use.
Another way for a tenant to get out of leases, of course, is to simply to break it. Simple to do but will likely complicate matters significantly, given in most cases rent will continue to accrue, as will legal fees, until the space is leased to someone else and the back rent has been caught up.
Before a tenant gets to that point they could consider subleasing the space by finding someone else to take over.
As it always is when dealing in legalities, even that isn’t easy. And it’s not necessarily a good solution.
In the case of a sublease, the owner of Joe’s Pizzeria isn’t doing well and can’t continue to operate the business. Joe finds out that Bill’s Pizzeria is looking for space and asks Bill to take over the space.
Joe becomes the sub-landlord and is still responsible for the terms of the lease. One potential hiccup? The landlord could reject it.
“There’s no corresponding law that obligates the landlord to agree to a sublease,” Norton says. “And your lease will usually speak to it, your lease will usually say something like ‘tenant shall not sublet the premises without the express written permission of the landlord.’ So, in other words, to do that, you would have to get the permission of the landlord.”
The most common, and easiest, way to get out of lease then is an assignment.
Landlords, especially shopping center owners, have a vested interest in tenants doing well. When one business is successful, that generally means those around it can also do well.
Which means when a business is having a hard time, the landlord is going to be motivated to get a business in there that can perform and help keep a parking lot full.
This means if a tenant who is struggling finds a suitable replacement, they can assign the lease to the new business, allowing it to take over the space.
Unlike a sublease, Norton says, “the landlord, and this is actually by law, the landlord has to agree to an assignment unless the landlord has a commercially reasonable basis to reject the proposed assignment.”
(Commercially reasonable can be if the replacement tenant is a small grocery and there already is a Publix in the shopping center.)
“When I get tenants, commercial tenants, who come to me and say, ‘Hey, I need out of this’ and usually there’s nothing in the lease that will allow them to get out of it. That’s what I tell them to do,” Norton says. “Work with a business broker and a real estate broker. See if you can identify someone who might be willing to come in and take over that lease. And then we can put a package together and present it to a landlord for consideration.”
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