How to Terminate a Commercial Lease Early

Many of my clients have stated, “I don’t want to sign a long term lease like 5 years or more because I’m not sure I will be in business that long or might need more or less space.”   My answer to them?  It’s usually in their best interest to sign a long term lease and there are ways to terminate a lease early.

Signing a longer term lease between 5-10 years makes good sense for many reasons.  You normally get the best economic deal that way with lower rent, more free rent and more tenant improvements paid by the landlord.  You normally get more options like renewal options with more time.   You don’t have to worry about moving sooner either or having to pay a much higher rent in 1-3 years if the market rates increase.  Keep in mind that many landlords won’t agree to less than a 5 year term, especially for space in demand where another party will lease it for 5-10 years, so it will really limit your options for properties if you want to do less than a 5 year term.

If you need to terminate a lease early, you have many options available to you.  You can request an early termination option of the landlord in your lease, but most landlords don’t like to grant them.   If they do, they want enough time to release your space so a 6-12 month notice from you might be required.  You might then have to pay back unamortized tenant concessions like free rent and tenant improvements.  But this is still a good option to have if you can get it.

What if you can’t get the landlord to agree to an early termination option?  There are still other good options like having the right to relocate in the project to a larger or smaller location.  You also generally have rights to sublease or assign your lease to another qualified tenant.

If none of the above options work out, then you can still legally terminate a lease in most states like California.  Courts usually require a landlord to mitigate a tenant’s damages.  This usually means the landlord has to take reasonable steps to re-lease the space, but this mitigation usually only starts after you vacate the space –not while you are in it.  However, I have seen most legal awards and arbitrations settle between 6-12 months of rent.  This is generally the most a landlord can squeeze out of a tenant in Southern California.  This can be a tricky matter, so you have to make sure you do it right and use someone familiar with the process like me or a good real estate attorney. You might need both.  But I have been very successful negotiating an early lease termination for my clients.

Contact David Massie for more help:   805-217-0791 or david@djmcre.com

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