Commercial Lease Early Termination Clause
A commercial lease early termination clause will allow you to break a commercial lease before it is set to expire in certain circumstances.3 min read
2. Liability for Early Termination
Updated June 25, 2020:
A commercial lease early termination clause will allow you to break a commercial lease before it is set to expire in certain circumstances. Not every commercial lease will include this clause, so you should be very careful about trying to cancel a lease early, as you may find yourself at risk for a lawsuit.
Can Commercial Leases Be Terminated Early?
If you own a business, there are countless reasons why you may want to terminate a commercial lease before it is set to expire. For example, your business could be struggling, and you simply don't have the money to keep up with your lease payments. Additional reasons to end a commercial lease early include:
- Market changes.
- The commercial space no longer meets your needs.
- You wish to end your business and move on to another project.
No matter why you want to end your commercial lease, terminating the agreement will likely be a struggle. Your landlord will be counting on your continued lease payments, as looking for new tenants can be very time-consuming and costly. Also, having an empty commercial space means lost revenue. Because of these reasons, most landlords insist that commercial lease agreements include stiff penalties for ending a lease early.
Generally, you will face liability when terminating a commercial lease early. The only exception is if the lease includes an early termination clause. Typically, a commercial lease is set to last for a specific period of time. In some cases, these leases can last as long as 10 years. If you have signed a fixed-term commercial lease, you will be responsible for the lease for its entire duration, even if you're forced to close your business.
When negotiating a commercial lease, it will be very difficult to get your landlord to agree to include an early termination clause. Even if the landlord does agree, his or her lender may veto the clause.
If you are able to secure an early termination clause, you should respect certain restrictions. For instance, you will likely need to wait a few years into the lease before using the clause will be executable, and you will usually need to pay a termination fee. The landlord may also request that you cover some of their expenses, including making improvements to the commercial space.
Before signing a commercial lease, you should carefully review the agreement so that you can be sure you understand its terms, including the possibility of ending the lease early.
Here are some questions you should keep in mind when reviewing a lease agreement:
- Can the landlord assign the lease to a new tenant if the agreement ends early?
- Does the landlord have unlimited power to accept or reject an assignee?
- What are the damages, if any, for ending a lease early?
- Does the lease include a recapture clause?
Liability for Early Termination
If a tenant ends a commercial lease before the agreement is set to expire and there is no early termination clause, he has breached the contract. After a breach, the landlord can sue the breaching party for monetary damages. Measuring the harm caused by a broken lease can be difficult, which is why many leases include a provision that a tenant will need to pay the landlord a flat sum if the lease is broken.
An acceleration clause may also be included in a lease. These clauses require that if a tenant breaks the contract, they must pay the entire amount that would be due to the landlord had they completed the lease. When ending a lease early, you will almost always face some form of liability. In addition to paying any outstanding rent, you also may have to pay a portion of the rent due for the remainder of the lease.
In some cases, tenants 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.
Realistically, if you don't have the money to hire a lawyer, you will likely face an unfavorable judgment in a court case, meaning you would need to pay your former landlord the full amount they are owed. Even though it can be expensive, you should hire a lawyer when terminating a lease early, as you may end up paying much more in the long run.
If you need help interpretting a commercial lease early termination clause, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.