Exiting Your Space
Legal Strategies for a Smooth Transition
Ensure a seamless exit from your leased space with expert legal solutions to avoid costly pitfalls.
Ending a Commercial Lease
Ending a lease requires careful planning to avoid unexpected costs and obligations. Key considerations include providing proper notice, restoring the space, handling remaining payments, and documenting the property’s condition. Clear communication with the landlord also helps to ensure a smooth transition. This article introduces some common issues to spot when getting ready for your move.
Notice Requirements and Rental Period
When ending a commercial lease, first check the notice requirements and lease terms, including renewals or extensions. Most leases require a set notice period before moving out, with specific instructions on how to notify the landlord (e.g., by mail). Some commercial leases are renewed annually, and late or incorrect notices could be costly, especially since re-renting commercial spaces can take a long time, even years. Do not count on a landlord being reasonable or forgiving notice defects, even minor technical defects.
Removal of Trade Fixtures and Other Property
Trade fixtures and personal property refer to the things a tenant owns and installs or keeps at a leased property. Some items are movable, these fall into the category of personal property. Examples include inventory, free-standing equipment, and furnishings. Other items require removal and detachment from the property, these fall into the category of fixtures. And some fixtures that are specific to a business, such as a kitchen, display shelves, or a dentist chair, fall into a subcategory of fixates called trade fixtures. Generally, tenants may remove personal property and trade fixtures. Tenants should review lease language to be sure though, sometimes the landlord establishes a security interest or lien on personal property or trade fixtures, and leases frequently discuss ownership of other fixtures. If the lease is unclear, general rules governing fixtures, trade fixtures, and personal property will apply. The more capital intensive a business’s use of the rented space is, the more significant these terms will be.
Moving Before a Lease is Over
Commercial tenants may need to vacate a property before their lease term ends, but doing so often comes with significant financial and legal consequences. Unlike residential tenants, commercial tenants have few legal protections, and landlords frequently require personal guarantees, making it difficult to avoid liability even if the business dissolves. Early termination can lead to substantial penalties, including unpaid rent, damages, and potential lawsuits. As a result, tenants should carefully review lease terms and explore negotiation options before attempting to exit a lease prematurely.
Assignment and Assumption
An assignment happens when a tenant transfers the remaining balance of their lease term to a new tenant, who takes over the lease. In some cases, assignments can be very valuable to incoming tenants, for example, when rents in an area have increased significantly and there is a long term left on the lease. While landlords may need to approve, they usually can’t unreasonably deny commercial assignments—The landlord must respond timely and articulate legitimate commercial reasons for denials. However, it’s important to note the original tenant remains responsible for the lease and may have to cover costs if the new tenant defaults, or leaves. Regardless of what is agreed with the landlord, the tenant may also wish to include indemnification terms or request their own personal guarantees when negotiating the assignment with their new assignee.
Novation
Novation is a lot like an assignment except it totally replaces the old lease with a new one, fully releasing the original tenant from liability. This requires the landlord’s consent. Unlike with assignments, there is no legal right to novation, however, it may be possible to negotiate an option for novation as a lease term.
Subleasing and Sublicensing
Subleasing is when a tenant re-rents some, or all, of their leased space to other tenants, their subtenants. A great example would be leasing out unused, vacant, offices a-law-coworking-style. By contrast, sublicensing occurs when a landlord licenses the use of their leased space to other licensees, their sublicensees. These options are a lot like assignment except the tenant retains the balance of the lease with the landlord and usually remains responsible for payment of rent. Note, like novation, subleasing and sublicensing are not a legal right and may be prohibited by lease terms.
Lease Buyout
A lease buyout is an agreement where a tenant pays a negotiated amount to end their lease early, releasing them from further obligations to the landlord. Some landlords include buyout clauses as options, in some cases these clauses may also appear as liquidated damages where a landlord fixes the amount of cost it expects to incur in the event of early termination. If a lease does not contain such a clause, a buyout is also something many Landlords are willing to negotiate.
Sale of Business
If leaving a leased space early is not possible, business owners may also consider selling their business along with its lease. Unless the lease explicitly states a default event, selling the business can be a reasonable option because, as far as the landlord is concerned, the tenant is not changing. This can be particularly attractive when the incoming purchaser plans to continue using improvements that would otherwise be expensive to remove. Personal guarantees, however, will remain in place and need to either be addressed as part of the business purchase and sale, or amended by the landlord.
Disclaimer
This article is provided for informational, educational, and marketing purposes only and does not constitute legal advice. The content is current as of its publication or last review and may not reflect the latest legal developments. Do not rely solely on this information—consult a qualified attorney regarding your specific situation.
Get Help Moving
If you are thinking about breaking a commercial lease, consider scheduling an appointment with Cascade Counsel today to understand your rights and obligations. We’re also happy to help you with negotiations and correspondence as well as preparing any necessary documents.
