How to Get Out of a Commercial Lease

Image credit: Pexels

TLDR

Before you decide to terminate your lease, you first need to know what it says.
Some key lease provisions that you should understand include: lease term, early termination, sublease, lease amendment, abandonment, force majeure, and guaranty.
Be sure to include the following information in your lease termination notice: your name; the address of the leased property; a statement reflecting your intent to terminate; the date on which you want your lease to end; the date on which you will surrender your keys; a forwarding address (so you can receive the refund of your security deposit); and your signature.
In most cases, lease termination notices should be sent at least thirty days in advance. However, it’s important to note that the lease itself determines the time frame of the termination notice. As such, be sure to date your letter, indicating the start of the notice period.
Because a commercial lease typically has a set termination date, this provision governs when your contract terminates. However, if you want to terminate early, check your commercial lease to make sure it’s permitted.
If your lease automatically renews, you’ll need to submit a written letter to the landlord explicitly stating that the lease will terminate on the date specified in the agreement with no renewal for another term.
If your lease agreement does contain an early termination provision, then you’ll reference that section of the lease in your termination letter. Additionally, you’ll also state whether you need to pay a fee for terminating your lease early, referencing how and when you’ll pay that fee to the landlord.
If your lease agreement does not contain an early termination provision, then you’ll acknowledge that the landlord will be losing money because you decided to leave early. To help offset this and potentially negotiate an early termination, you can offer to pay for part of the losses, or you can suggest another tenant who may be interested in subleasing all or some of the space.

There’s no doubt that the global pandemic affected how we work and live. And several industries have been hit hard by the sudden shuttering of businesses in 2020. One of the hardest-hit industries was commercial real estate, as employees shifted to work from home models. In a recent survey, 47 percent of respondents stated that their companies would reduce their physical office space due to the global pandemic, with many employees continuing to work from home or use a hybrid approach to work locations.

The pandemic did not just affect commercial space property owners. Tenants were drastically impacted as well. With an economic crash, tenants fell behind in their lease payments. For example, according to the New York Times, “Simon Property Group, the biggest mall operator in the United States, this week sued Gap, the owner of retail chains that include Old Navy and the Banana Republic, for nearly $66 million in unpaid rent for April, May, and June.”

Millions of other tenants were forced to pay rent for space they weren’t using or attempted to terminate or renegotiate their leases.

This article will explore how to get out of a commercial lease—both in normal times and not-so-normal ones.

Understand Your Lease Agreement

Before you decide to terminate your lease, you first need to know what it says. Here are some key lease provisions that you should understand.

Lease term. Your lease term tells you when your lease begins and ends. It may also reference whether your lease automatically renews.
Early termination. This provision allows you to terminate your lease early. If you have an early termination provision in your lease, it should also reference whether you can terminate with or without financial penalty, often called a termination penalty. Also, it would be best if you understood whether you forfeit any of your security deposit by terminating early.
Sublease. Your lease agreement may allow you to sublease your space. This lease section should describe how to do this, if notices are required, and if landlord approval is needed.
Lease amendment. Another provision that you should be familiar with is amendment provisions, allowing you and the landlord to amend your lease and perhaps your term or ability to terminate. Typically, lease amendments need to be in writing and approved by all parties to the contract.
Abandonment. Often, leases will contain abandonment provisions, meaning that they can claim that the tenant breached the lease agreement if they abandoned the property.
Force Majeure. Force majeure directly translated means “superior force.” Black’s Law Dictionary defines it as “an event or effect that can be neither anticipated nor controlled.” Force majeure events include “[w]ar, riots, earthquakes, hurricanes, lightning, and explosions, for example, are force majeure events. The term also includes energy blackouts, unexpected legislation, lockouts, slowdowns, and strikes.” Over the last fifteen months, one hot topic was whether the COVID-19 pandemic qualified for force majeure treatment, meaning that the tenant could terminate the lease early. Some leases allowed it, and some didn’t.
Guaranty. Another provision that you need to be aware of is a guaranty provision. Guaranty provisions essentially state that you, as the founder renting the space, are personally liable for any rents owed.

How to Write a Lease Termination Notice

Now that you’re familiar with some key terms in your lease agreement, let’s look at how to write a lease termination notice. First, be sure to include the following information in your lease termination notice:

Your name
The address of the leased property
A statement reflecting your intent to terminate
The date on which you want your lease to end
The date on which you will surrender your keys
A forwarding address (so you can receive the refund of your security deposit)
Your signature

In most cases, lease termination notices should be sent at least thirty days in advance. However, it’s important to note that the lease itself determines the time frame of the termination notice. As such, be sure to date your letter, indicating the start of the notice period.

If your lease contains an early termination clause, then be sure to follow the terms of your commercial lease agreement carefully. You’ll draft a termination letter with the same information referenced above, but you’ll also specifically reference the ability to terminate early according to your lease.

Commercial Lease Termination Letter to Landlord

When you’re writing a commercial lease termination notice to your landlord, you’ll need to consider a few additional elements. First, because a commercial lease typically has a set termination date, this provision governs when your contract terminates. However, if you want to terminate early, check your commercial lease to make sure it’s permitted.

Thus, for a commercial lease, you may need to write a termination letter to the landlord in one of two situations: (1) if the lease automatically renews; or (2) if you want to terminate early.

Automatic Renewal

If your lease automatically renews, you’ll need to submit a written letter to the landlord explicitly stating that the lease will terminate on the date specified in the agreement with no renewal for another term. Additionally, you’ll include the information specified in the section above as well.

Early Termination

Instead, if you want to terminate your commercial lease early, at the beginning of your letter, be sure to specify the property address about which you are writing. As commercial landlords may have multiple properties, you want to direct their attention to your leased property right off the bat. Please don’t make them guess or create extra homework for them.

Second, you’ll introduce the reason why you need to terminate your lease before the end of the lease in your letter. Again, you don’t need to go into great detail, but you need to mention why. For example, you may say that you need to end your lease early because of “reasons beyond your control” or that your financial situation has changed. The COVID-19 pandemic and its related fallout is an excellent example of both reasons.

Next, you should specify the specific provisions in the lease that are affected by early termination. For example, you’ll determine the last day that you’ll occupy the space, which may differ from the termination date in the lease agreement.

If your lease agreement does contain an early termination provision, then you’ll reference that section of the lease in your termination letter. Additionally, you’ll also state whether you need to pay a fee for terminating your lease early, referencing how and when you’ll pay that fee to the landlord.

If your lease agreement does not contain an early termination provision, then you’ll acknowledge that the landlord will be losing money because you decided to leave early. To help offset this and potentially negotiate an early termination, you can offer to pay for part of the losses, or you can suggest another tenant who may be interested in subleasing all or some of the space.

As another alternative, you can suggest that the landlord keep some or all of your security deposit, helping to offset any losses. Finally, by acknowledging the losses and inconvenience of your early termination, you may negotiate a civil termination of your commercial space.

Additionally, as you end the letter, ask for a response or counteroffer from the landlord. After all, if you’re trying to terminate your lease early, without an early termination provision to govern the process, the more accommodating you are, the more likely you can agree with the landlord. On the other hand, resorting to legally threatening letters won’t get you far.

If you do ultimately come to an agreement to terminate your lease early, be sure that you and your landlord enter into a written termination agreement, documenting the terms of the early termination.

Commercial Lease Termination Letter to Tenant

If, as a startup, you are the landlord and not the tenant, you may encounter a tenant that you don’t want or one that has violated one or more terms of the lease. Therefore, before your draft a letter of termination, check your lease document first, determining if you have a lease termination provision before the end of the term.

For example, your lease document may explicitly state that you can terminate the lease if the tenant breaches one of the agreement’s provisions. In that case, here is how you write a commercial lease termination letter to the tenant.

A notice of termination in a written letter form is important to document why and when the lease ends. You should specify the lease provisions that have been breached and that the resulting breach gives you the ability to terminate the contract according to its terms. Further, you should specify the day that the tenant should move out and any fees owed.

Suppose the tenant does not vacate the premises on the day specified in your termination letter. In that case, you may have the ability to charge them additional fees as a holdover or take further legal action to evict them. Remember that the terms of your lease govern here. Therefore, that is the first place you should look to determine your next course of action.

Additionally, it would be wise to contact an experienced attorney in landlord-tenant law to help identify your options.

Learn more with us

Access more guides in our Knowledge Base for Startups

We can help!

At AbstractOps, we help early-stage founders streamline and automate regulatory and legal ops, HR, and finance so you can focus on what matters most — your business.

If you're looking for help on hiring immigrants legally, get in touch with us.

Like our content?

Subscribe to our blog to stay updated on new posts. Our blog covers advice, inspiration, and practical guides for early-stage founders to navigate their startup journeys.

Note: Our content is for general information purposes only. AbstractOps does not provide legal, accounting, or certified expert advice. Consult a lawyer, CPA, or other professional for such services.