With many businesses still struggling to pay rent due to the nearly year-long pandemic and commercial landlords with troubles of their own meeting their payments to lenders and other creditors, both groups have become increasingly aware of the importance of early termination clauses in commercial lease agreements. Such clauses will allow one or both parties to end obligations under the lease before it is set to expire under certain circumstances.
A tenant will typically want to right to terminate for not only the inability to pay rent and other charges, but also in the event its needs change, such as a desire for a larger or smaller space. In turn, a landlord will seek to make it difficult for a tenant to terminate early by imposing financial penalties for an early exit. It may also want the right to unilaterally terminate, if for example, it wants to sell the property or convert it to a different use.
Generally, if a tenant has signed a fixed-term commercial lease, it will be responsible for the lease obligations for its entire duration, even if forced to close their business. In some cases, a tenant may be able to mitigate the amount that they owe the landlord by proving that the landlord could have avoided losing rent by leasing the space to another tenant. However, the landlord may also request that a tenant cover some of their expenses, including making improvements to the commercial space prior to vacating.
Landlords should consult with counsel to make sure the commercial lease adequately protects their interests in the event a tenant tries to terminate before the end of the lease term. Similarly, tenants should not sign such an agreement without first consulting with an attorney, who can often negotiate changes to make it easier and less costly if the tenant has to break the lease. Often the parties may agree to provisions that may give both sides a way to provide for the tenant’s early termination without financial damage. For example, they may include a section allowing for a tenant to assign the lease to another business (with certain qualifications, such as sufficient net worth) instead of having the tenant liable for the remaining term.
Landlords and tenants starting lease negotiations should adopt a practical, long view approach aimed that allows the tenant’s business and the landlord’s income stream to return to pre-pandemic levels. Landlords should consider the possibility that tenants will be able to recover lost revenue once the pandemic ends and perhaps allow for a deferment of rent. Likewise, Tenants should recognize that landlords may need lender consent to modify a lease and that reduced rent can impact a landlord in many ways, including affecting their ability to make mortgage and property insurance payments.
During this public health and economic crisis, many tenants have tried to use force majeure clauses that are often in lease agreements as a way to escape their commercial leases due to unforeseen events beyond their control, such as public health events like the COVID-19 pandemic. However, given the uncertainty of whether a court would rule that such a clause would apply, both tenants and landlords are better off working out a mutually satisfactory way for both sides to minimize their respective losses and have the lease remain in effect for the full term. Better yet, they will have a well-drafted lease that will cover their respective concerns both during this unprecedented time and post-pandemic.
For more information, contact Stewart Banner.
