The best time to think about getting out of a business
lease is before you sign it. For the many companies with leases signed, perhaps
too casually, before the economy tanked, that's little help. While their
numbers are down from recent highs, businesses still come to my law firm
looking for the magic bullet out of their leases. (Spoiler alert: there is no
A lease is the most common, yet least understood, contract a human-owned
business will sign, so a post on exit planning for leases is going to be
helpful whether you are trying to get out of or in to a lease. Exit planning,
by the way, isn't limited to just the owner's exit from the business. How key
relationships, including the one with your landlord, end is a subject deserving
forethought in any business.
I blame professional sports for the unrealistic expectations some businesses
have toward contacts, including leases. If you regularly hear about the rising
star athlete who gets out of the contract signed when he or she was a bit more
humble, you might get the impression that your business can get out of a
contract whenever a better offer comes your way.
That your business is suffering, or rent is lower across the street (or even in
your building), is generally of no concern to your landlord--other than at
renewal time. Supposing the landlord is willing to do something for you,
chances are the landlord has its own contract it can't get out of-a mortgage.
Your lease is part of their collateral, so the landlord's lender has much less
interest in helping you out of the lease, than in helping you in.
If your business is viable, any change in your lease has
to present some upside to both landlord and lender Personal guarantees,
commonly required in leases to human-owned businesses, give the landlord and
lender still less reason to make a deal, even if your business is struggling.
There are, however, still some options, though they are MUCH better discussed
before the lease is signed.
The typical lease gives the landlord the right to
collect, upon a default of the lease, from your business (or you, if you are a
guarantor) an amount equal to the sum of any past due rents plus all future
rents for the remaining term, discounted to present value. If the landlord can
re-let the space, the former tenant gets a credit for the rent paid, less the
landlord's costs-such as brokerage commissions and improvements to the space
required for a new tenant. Thus, what you owe on default of your lease can be a
huge number. But it doesn't have to be.
When negotiating the lease, cap on your default liability
in the form of a buyout-a fixed sum you pay to get out of the deal. If you
can't limit the business's exposure, try to limit the terms of any personal
guarantee. If you didn't get a buyout in the lease, asking the landlord for a
buyout now is asking them to weigh the bird in the hand against those in the
bush. Depending on your financial circumstances and the market, trading your
lease for cash in-hand, or even a little cash and a secured promissory note,
might be a viable option for landlord and lender.
In Part 2, I'll cover three more options for getting out of a lease: Assignments
& Subleases, Landlord Take Backs, and Extending the Term.
Read more posts about business law by Jim Thomas
at his blog, No Funny
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