Before my schedule bogged down in tinsel and year-end
deadlines, I posted on a question that's been almost common: "I signed this
lease before the economy tanked. How can I get out of it?" Typically, the
business has contracted to a degree that it no longer needs, or simply
can't afford, all (or any) of the leased space.
While there are no magic bullets, there are four ways to eliminate or reduce
the burden of a lease on a business. The first option, explained in Part
1 of this post, is buying out the lease. Let's now consider options two
Assignments and Subleases.
Oversimplified and misunderstood, subleases and assignments have someone else
take responsibility for some or all of your space. They can be useful, but be
clear about the differences between the two approaches. Also understand the
requirements your lease imposes on your ability to use them. Typical leases
give the landlord rights to approve your deal (with you paying for the
landlord's costs in doing so).
Also know that in today's market, with rents down and vacancies up in many
places, the chances of finding a subtenant or assignee (who will expect to pay
less rent to you than they would to the landlord) to get you completely off the
financial hook, are low. You may have to settle for a deal that leaves you
responsible for some part of the rent obligation.
In an assignment, the new tenant takes over your lease with the landlord, but
that might not take you out of the equation. An assignment does not automatically
release the original tenant or personal guarantor from liability. If the new
tenant doesn't pay the rent or otherwise defaults, the landlord will come
looking for you. Therefore, you may not have improved your situation at all,
and may have made it worse. If an assignment doesn't include a full release
from liability, you may be better off subleasing.
In a sublease, you become the landlord, or in legalese, a sub-landlord (if your
lease IS a sublease, a sub-sub-landlord, and so on). Your liability to your
landlord is not changed by a sublease, but you have a better chance to protect
yourself than in badly handled assignment. Since your sub-tenant is paying the
rent to you, you'll know when rent is being paid (or not), and you'll have the
legal right to pursue the sub-tenant for the unpaid sums. On the other hand, a
sublease can be trickier than an assignment in that you need to make sure the
critical provision of your lease and the sublease match up.
Maybe the landlord will agree to take some or all your space back. Maybe the
Mayans are right and the world will end on December 21, 2012 this year, so why
worry about your lease? But seriously, a take-back may not be likely, but it is
worth thinking through. If your business has a below-market rent, yet it is
still struggling in this economy, your landlord may see the benefit in taking
space back. If market rents are down, it may be necessary to sweeten the deal
with an agreement to cover some or all of the spread between your rent and the
new tenant's deal.
Extend the Lease
It sounds counterintuitive, but extending the term (lengthening the lease)
might solve your current problems with the lease. There is no free lunch (or
magic bullet); you will pay more over the long run with this approach. The
landlord agrees to reduce your rent in the short term if you agree to a longer
term with higher rents in the future. Thus, you and the landlord are betting
that business will get better and your company will be able to handle that
increased burden. If you have personally guaranteed your lease, kicking the can
down the road could be a terrible decision. Either be sure the Mayans are
correct about 12/21/12, or carefully work through the idea with your attorney,
before agreeing to a deal like this.
Remember, a premature exit from a lease is best negotiated before you sign it,
and the best way out of a bad lease, or any bad contract, is not signing it.
Your business lawyer can help you think through the issues.
Read more posts about business law by Jim
Thomas at his blog, No
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