Commercial leases help landlords lock in a source of revenue and tenants obtain reliable facilities in which they can operate. While residential leases often last for as little as a single month or a year, commercial leases tend to have a much longer overall duration.
Most commercial leases last for at least three years, if not longer. However, business operations can change dramatically before a tenant completes their lease. A company may falter and be at risk of going out of business. Other times, an organization might thrive and could benefit from moving into a bigger space.
What are the most common solutions utilized in scenarios where tenants expect to terminate a commercial lease early?
Invoking a force majeure clause
Commercial tenants sometimes specifically include protective terms in the initial lease in case they need to end the agreement early. A force majeure clause allows a tenant to end a lease in scenarios where they can no longer operate the company due to factors outside of their control. Terrorism, extreme weather damage to local infrastructure or supply chain disruptions might lead to a tenant ending a lease early because of a force majeure clause in the original agreement.
Arranging for a lease assignment
Sometimes, commercial tenants want to move out to bigger facilities or relocate to a different area. Provided that the lease does not prohibit doing so, they might look for another tenant to take over the remainder of their commercial lease. In a lease assignment scenario, an outside party agrees to move into the space and take over the lease on behalf of the initial tenant. Some landlords explicitly prohibit lease assignment, while others are happy to allow current tenants to help them locate future tenants.
Filing for business bankruptcy
Leases are executory contracts. In scenarios where a business needs to restructure or dissolve, business bankruptcy may be part of that process. Executory contracts are eligible for one of three solutions in a business bankruptcy scenario. The tenant could reaffirm the lease. They could seek to assign it to someone else or they could ask to terminate the lease early because they intend to close down the business or cease operating at certain locations.
Frequently, landlords and tenants alike have to be ready for the possibility of a commercial lease ending before the actual end of an agreement’s term. Disputes about that process could lead to litigation. Considering different solutions for early lease termination can be beneficial for landlords and tenants alike.
