Breaking Commercial Leases Text Size:

There are many advantages to leasing commercial real estate instead of buying it. In particular, leased space gives businesses greater flexibility and fewer property-management responsibilities, along with requiring less money for a security deposit than you'd probably need for a down payment on purchased property. But you may have to deal with complicated legal issues if your business needs to break or breach its lease or is unable to satisfy its obligations under the terms of the lease.

A contract is breached when a party to the contract violates its terms and conditions. For example, if a contract, such as a lease, requires you to pay $1,000 on the first day of each month, you would be in breach of the contract if you paid on the second day of the month or if you paid $800 on the first day of the month or if you failed to make any payment. The terms and conditions of many contracts say that when one party breaches a contract, the other party to the contract has the legal right to terminate, or break, the contract.

Why Terminate a Lease?

There are many reasons why businesses will want to terminate their lease, but most reasons generally fall into one of two categories:

• The space no longer fits your business's needs
• The space is too expensive

Try to Legally Terminate the Lease

Before breaching the lease, see if your landlord is willing to work with your business to reach a mutually acceptable resolution. It never hurts to ask a landlord to modify the lease. Depending on your specific reasons for wanting to end the lease, see if the landlord is willing to reduce the rent, shorten the contract, take back some of the space, let you move to alternate space that the landlord owns, or allow you to sublet some or all of the space.

It's important to remember: Don't withhold payments as a negotiation tactic. This will probably put your business in breach of the lease, which will actually worsen your negotiating position.

If you're unable to negotiate with the landlord, have a real estate lawyer review the lease. Your attorney may be able to find a way to legally terminate the lease without negative consequences.

Among the issues to consider when reviewing the lease:

• Does the lease allow the tenant to break it without cause?
• Does the lease allow the tenant to break it with cause?
• Has the landlord failed to fulfill his contractual obligations?
• Did the landlord fraudulently fail to make necessary disclosures about the property?
• Does the lease allow the tenant to sublet the property?

Consequences of Breaching a Lease

If you have no choice but to breach the lease, it's important to understand the consequences. Depending on the laws of your state and the terms of your lease, your landlord may:

• Lock your business out of the property
• Keep your security deposit
• Sue your business for all unpaid past and future rent for the duration of the contract, which is called compensatory damages
• Ask the court to require your company to pay the landlord's legal fees
• Evict your company from the leased premises

Many businesses will breach a lease because they can't afford the rent and related expenses. But the legal expenses and potential court judgments may prove to be much more expensive in the long run.

One factor may lessen some of the expenses. In many states, landlords are legally required to attempt to re-lease the property, which reduces the damage caused by the tenant's breach; this is called mitigating the damages. In a strong real estate market, when commercial space is scarce, this will work in the tenant's favor. But if the real estate market is soft, and commercial space is plentiful, the landlord may have a tough time re-renting the property.

Questions for Your Attorney

If you need to terminate your lease, an experienced real estate attorney can review the lease, offer strategies for legally terminating it and help negotiate with your landlord. Among the questions to consider asking your attorney:

• Have you previously worked with clients that were trying to break commercial leases?
• Is there a way to legally break my lease without financial consequences?

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