Exit Strategies in LeasingOctober 8, 2019
Leases aren’t easy to break, which is one reason why they can be 50 pages long. Even tough they aren’t easy to break, they aren’t unbreakable. While I don’t advocate backing out of a lease, there are reasons that companies may want to terminate their lease prior to their actual lease expiration date. Some common reasons that a company would end their lease early would be because the company has either grown, shrunk, been acquired, merged with another group, or the majority of their employees are commuting from another area.
Your lease is a contract and contracts are designed to give parameters for two parties who have an agreement and it spells out what each party’s obligation is to the other. If one side doesn’t live up to their side of the arrangement, there are consequences for those actions.
Subleasing: When you are negotiating your lease, you should be mindful of the type of an exit that you may need. The most common exit clauses in a lease would a sublease clause. Every lease has the right to sublease. At a minimum, you should spend some time with your adviser on the front end of your lease understanding the parameters that the lease spells out and then what is commonly negotiated. Next you should discuss any special circumstances that you see necessary and try to incorporate those as well.
Some common areas to focus on are the fees that you pay to the landlord for reviewing your sublease proposal, the timelines, the amount of the sublease proceeds that you get to keep should you sublease the space for more than you are paying, and review the restrictions of who you can sublease to as you may be surprised at some of the things in your lease.
Terminations and Buyouts: There are clauses that you can try to insert in your lease up front like a Termination clause or a Buyout clause. Termination clauses spell out how and when a tenant can terminate their lease. A Buyout is what happens when a Termination isn’t negotiated up front. A Buyout is simply a negotiated amount that takes into account the remaining obligation and unamortized costs for the lease which arrives to your Buyout fee. One note on the Buyout is the Buyout number can vary wildly based on the landlord and the circumstances that surround your lease.
Landlord Default: If your landlord breaches the lease, you may be able to terminate. I don’t believe I’ve seen this actually play out but who knows, you may have a special circumstance where this would be possible.
Bankruptcy: Bankruptcy can be a way out of your lease. While this isn’t a good scenario but if you find yourself in this situation, you should keep an open line of communication with your landlord as things progress. If you signed personally on your lease (look for a personal guarantee) you will be personally liable for your obligations. A Bankruptcy isn’t a fun exit but landlords will often work with their tenants to avoid a long legal battle.
If you find yourself in a lease and need to discuss an exit strategy, please give me a call at 925-239-1422. The best approach is to discuss your exit strategy up front so you can build in some flexibility in your lease. Regardless, of your situation, if you surround yourself with a professional team, you can improve your odds of a successful outcome.
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