Breaking the Lease is Not Always a Financial Decision
The decision to break a lease is not always completely a financial decision. There are sometimes other components which factor into the equation. For example a tenant may have only 1-2 months remaining on the lease agreement when they are offered a profitable business opportunity which will require the business to relocate immediately. Although breaking the lease that late in the agreement is usually not financially wise, the tenant may make this decision to avoid missing out on the opportunity.
Most leases offer the option to Sublease or Assign the space provided that the new tenant and terms are approved by the Landlord. This could really be the best option in many cases. It is important to hire the right broker with experience in subleasing commercial space to help with this process. Subleasing gives the tenant the option to replace themselves in order to avoid having to break the lease.
We have been helping businesses for years in this capacity. If you find yourself in this situation or know of anyone who is, reach out to us and we will help you evaluate the best solution based on your particular needs. If we cannot personally help you we can recommend another experienced professional in your area to do so.
Consider the Costs of Breaking the Lease
As previously mentioned there is typically a fee associated with breaking a lease. This fee is often set equal to several month’s rent in addition to losing any deposits held by the landlord. While paying this fee may seem excessive there are some instances in which it is an economically good decision to break the contract even though there is a financial penalty imposed.
Consider the example of a business owner who is the process of relocating due to a need to expand their business. The tenant may opt to lease a commercial space in the new state while the current location is put up for sale in the previous state. If the tenant enters into a 12 month contract under the supposition that it will take this long to sell the old location and purchase a new one, he may be surprised if his other property sells quickly and he finds a new one in his new state rather quickly. This may all occur within a matter of 2-3 months.
The tenant has the option to stay in the rented space until the rental agreement nears expiration and then start looking for a commercial space to purchase. However, this option runs the risk that the property he previously found will not likely be available. The tenant’s other option is to place a bid on the new property and plan on breaking the lease if he is able to close on the new property. In this case, the tenant would be saddled with both a rent and a mortgage for 9-10 months. This will likely be significantly more expensive than the price the renter would pay to break the lease.
Most rental agreements have a section regarding the renter breaking the lease agreement. While there is also likely a section or several sections regarding when the leasing agent can evict the renter, the section on breaking the lease should be of particular interest to those who might be in a position to have to break the lease some day. Renters should understand these contract terms so they can make an informed decision. Additionally the renter should consider all costs associated with breaking the lease. This includes both financial costs as well as emotional costs.
Understand the Contract Terms
Tenants should review their lease agreement carefully before signing this document. The lease agreement is a legally binding document which should be given proper consideration before entering into the agreement. Our suggestion is that you have your attorney review this agreement and insure that the terms meet all of your needs. This is important because understanding these terms will be essential if the need to break the lease becomes a reality.
Lease agreements typically do not allow the tenant to break the lease but if they do they may include permission to Sublease with the Landlords approval in addition to some form of penalty. This penalty usually comes in the form of requiring the renter to give a specified amount of notice before the contract is up and also requires the renter to pay a sum of money to break the rental agreement. A notice of 30 to 90 days and a lease break amount equal to several month’s rent are common penalties associated with breaking a lease, however, individual landlords may impose penalties which are either harsher or less severe.
Great Report… I am often asked about Cap Rates and which Commercial Product produces the most.
“See page 9”:
Click to access 2019-q1-commercial-real-estate-market-trends-and-outlook-05-22-2019.pdf
I’m super proud of my friend Danny being interviewed for this article with NAR regarding the O-Zones “Opportunity Zones” and their benefits. Want to know more? Message me…
For all my Business Owner Friends out there:
Here is an event you may enjoy . It will be held on Thursday, July 25, 2019, at the Fort Lauderdale Convention Center.
GrowthX Founding Partner, Sean Sheppard, to Keynote SUP-X: The StartUp Expo