Termination Tactics: Tips for Terminating a 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 prior to the end of the term.
With franchisor support, better name recognition and industry history behind them, franchise tenants are typically more desirable to a commercial landlord than independent business operators. Even though you may have had the advantage in negotiating your initial lease with your landlord, you will not have this same advantage when terminating your lease.
As The Lease Coach, 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. If the business is failing, should the tenant continue to lose money? No. You have numerous options available that may or may not help you to terminate - perhaps with limited personal loss and damage. 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" (or "surrendering 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.
- 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. It is, in fact, to the landlord's advantage to precipitate a vacancy by working in advance to find a replacement tenant. 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 signage welcoming a new tenant 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. 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 another unit 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 rent more affordable. A commercial landlord can be willing to free you from one leasing obligation should you remain in his/her 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 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.
Dale Willerton is The Lease Coach and a senior commercial lease consultant who works exclusively for tenants. Dale is a professional speaker and author of Negotiate Your Franchise Lease or Renewal. Got a leasing question? Need help with your new lease or renewal? Call Dale at 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com / www.HelpULeaseFranchise.com.