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When the party's over: How to terminate a lease

Terminating your store's lease is naturally not something landlords view favorably, since an empty unit never generates any income, but sometimes it has to be done and it will likely never be as smooth a process as it was to negotiate the lease initially. Here are five great tips to get you started and keep you savvy throughout the process.

October 22, 2018

By Jeff Grandfield and Dale Willerton/Lease consultants

Terminating your store's lease is naturally not something landlords view favorably, since an empty unit never generates any income, but sometimes it has to be done and it will likely never be as smooth a process as it was to negotiate the lease initially. 

Over the years, the tenants we've worked with have frequently asked how they can "break a lease" and the good news you have several options that can help you terminate the agreement with limited personal loss. Here are some of the tips we recommend:

• Understand the language: In reading this so far, you will have likely noticed we have referred to "terminating" leases over the oft-heard phrase "breaking a lease." Stick with the reference to terminating the agreement since the latter phrase can suggest legal or ethical problems and  the way you talk about your wishes can, in this case,  set the tone for success or failure. 

• Talk to your landlord: As professionals who handle these types of negotiations frequently we can tell you we've been very successful in persuading commercial landlords to take back their space when tenants are struggling. The landlord can then re-lease the space and it's to his or her advantage to precipitate a vacancy by working in advance to find a good replacement tenant. 

It works out more profitably in the long run in most case because the landlord maintains cash flow without the adornment of a sign advertising a "Going Out of Business Sale" or "For Lease" sign in the property's window.                 Instead, a "Coming Soon" or "Grand Opening" sign speaks better for the property's overall business potential. 

• Find a replacement tenant:Commercial landlords are likely to be more cooperative in a lease termination if a replacement tenant can be found, allowing the existing tenant to surrender the lease agreement and location back to the landlord. 

Commercial tenants signing a surrender agreement can vacate the premises immediately or continue occupying it              until a new tenant is found since a new formal lease is drafted for each tenant before they begin paying rent.  

• Assign your lease agreement: When you assign your agreement you find another prospective tenant to take over your commercial space and current lease terms. If the party that the lease is assigned  to is also a restaurateur who has purchased your business landlords find this more acceptable than if the "permitted use" is completely changing to a different industry. In this case, a secondary or replacement Formal Lease is not required. Usually, a two or three-page lease assignment -- prepared by the landlord -- will be all the documentation required to complete the transaction.  

• Consider other vacant space within the same rental property: If there is something more in line with your needs, perhaps with less space or storage room, downsizing might be a more affordable option. In such circumstances, a commercial landlord will often agree to free you from one leasing obligation if you remain in his or her property. Downsizing is a common solution for restaurateurs struggling with rent. Often the problem is simply that the restaurant owner is simply leasing more square footage than the business can successfully support. 

On a related note, if you are approaching your lease renewal due date and are uncertain about your business's future, it can be possible to include your own early termination clause in your lease. One older tenant we worked with needed a lease renewal but also wanted to add the right to close his business if his health worsened or he chose to retire. When we discussed this issue with the landlord and explained that the early termination right would be to close the business, rather than move to a competitor's property, the landlord agreed. 

Successful lease negotiations can make or break a restaurant, so carefully consider your situation before even attempting to terminate a lease. In fact, taking precautions prior to signing a lease in the first place is often a smart approach, including possibly even having a lease consultant review your documents for your future protection. This holds doubly true if you've never gone through this process before. 

Dale Willerton and Jeff Grandfield are jointly, The Lease Coach. As commercial lease consultant they work  exclusively for tenants and also co-authored, "Negotiating Commercial Leases & Renewals for Dummies."

Photo: iStock