Terminate Don't Break: Termination Tips For Your Commercial Lease
As a franchisee, you may have found it quite easy to secure a lease with a commercial landlord; however, you may face many roadblocks if, or when, you need to terminate your lease.
With franchisor support, better name recognition, and industry history behind them, franchisees are typically more desirable to a commercial landlord as tenants than independent business operators. Even though you may have had the advantage in negotiating your initial lease with your landlord, you may not necessarily have this same advantage.
I have been coaching and consulting with independent and franchise tenants since 1993. Over the years, how to terminate a lease has proved to be a common question and rightfully so. Should the tenant continue to lose money? No. There are numerous options available that we have been able to use to terminate leases for tenants - often with very limited financial losses and no bankruptcy required. In no particular order, my professional recommendations are as follows:
- Understand the language. In reading this so far, you will have likely noticed I have spoken of "terminating a lease" rather than "breaking a lease." In the real estate industry, the term "terminating a lease" is preferred over "breaking a lease." In the latter case, this suggests that you, the tenant, are doing something which is both legally and ethically wrong. It is quite possible to legally and ethically terminate a lease with your landlord. I regularly successfully arrange this for many tenants in both the restaurant industry and others.
- Talk to your landlord. I have been very successful in persuading the commercial landlord to take back the commercial space when the present tenant is struggling. The landlord can then re-lease the space. This allows the landlord to maintain cash flow. Instead of a conspicuous "Going Out of Business Sale" sign in a tenant's window or a "For Lease" notice on the outside of the property, the public will see a more welcoming "Coming Soon" sign announcing a new tenant moving into the property.
- Find a replacement tenant. Commercial landlords are more likely to be cooperative terminating your lease if a replacement tenant can be found for your space. It is, in fact, to the landlord's advantage to precipitate a vacancy by working in advance to find a replacement tenant. The existing tenant will surrender his/her lease agreement and location back to the landlord. A new formal lease is drafted for the new tenant. The new tenant signs his/her new lease agreement and begins paying the rent.
- Assign your lease agreement. Essentially, this means finding another prospective tenant to agree to take over your commercial space and current lease terms. If the person taking an assignment of your lease agreement has also purchased your franchise business this is more acceptable to the landlord than if the use is completely changing to a different industry. In this case, a secondary or replacement formal lease is not required; usually, a two or three-page lease assignment, prepared by the landlord, will be all the documentation required to get the job done.
- Consider other vacant space within the same rental property. Is there a smaller space more appropriate for your needs? Are you faced with excessive space? Can you downsize your operation? With commercial rents being charged by the square foot, franchise tenants leasing less space typically will find the gross rent more affordable. A commercial landlord can be willing to free you from one leasing obligation should you remain in his/her property. I've just completed this downsizing scenario for a franchisee effectively saving his business by reducing his gross rent by moving him to a smaller unit in the same property.
Overall, franchise tenants should carefully consider these various options as well as their own situations prior to terminating a lease. Taking initial precautions prior to signing a lease are often best (such as having a professional lease consultant review the document for your own protection). If you have never gone through this before, it is reasonable to expect that you will need some help.
Franchise tenants should not rely on their franchisor to proactively help them or troubleshoot their leasing problems. Often, the franchisor's real estate department is focusing on new leases for new franchisees but doesn't have the time or the budget to work with existing franchisees with leasing problems. Countless tenants, both franchise and independent, have benefitted by using an independent commercial lease consultant who is not acting as a real estate agent nor legal counsel. I specialize in negotiating lease renewal rent reductions, midterm rent reductions, and lease terminations. There is a formula that landlords will positively respond to so don't hesitate to call me for a free consultation.
Dale Willerton is The Lease Coach - a Senior Commercial and Retail Lease Consultant who works with franchisors and individual franchisees across NorthÂ America. Willerton is author of "Negotiate Your Franchise Lease or Renewal"; he speaks frequently at franchise shows and provides real estate training to franchisors and chains. Visit www.TheLeaseCoach..com / www.DaleWillerton.com/www.HelpULeaseFranchise.com or call 1-800- 738-9202.