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How can a commercial tenant end a commercial lease early?

Law Offices of Yu & Associates

Unexpected situations can occur in the course of running a business. Maybe your business is not doing well and cannot continue. Maybe the pandemic has caused turnover to drop sharply. Maybe your personal life has changed and you can no longer continue your business activities. If, at this time, your lease term still has many years to go, but you need to end your lease early, what can you do?

First of all, you cannot just ignore the existence of the lease agreement and choose to unilaterally walk out of the lease agreement. The landlord will not accept that. Doing so will lead to serious legal consequences, because you are still legally responsible for fulfilling the lease. A lease is a legally binding contract. If the tenant defaults, the landlord can demand that the tenant immediately pay any remaining rent under the lease. In any state, a landlord can sue a tenant for damages including unpaid rent and attorney fees. Therefore, if you want or need to get out of a lease, never abandon the lease without resolving the legal obligations under the lease.

You can ask a lawyer to review the terms of the lease for you, find the terms in your favor that may allow you to negotiate with the landlord, and end the lease early after both parties reach an agreement. The terms and conditions below may give you and the landlord the possibility of early termination of the lease.

Early termination clause

If you have an early termination clause in your lease, you can legally end your lease early by paying the additional costs required under this clause, which might be two months' rent or more.

Force majeure clause

A force majeure clause is one that allows a tenant or landlord to terminate an agreement if an event beyond the control of both parties occurs that prevents the landlord or tenant from fulfilling their contractual obligations. Natural disasters such as earthquakes or events such as wars or acts of terrorism are listed in this clause as the events of force majeure. Courts generally do not go beyond the specific events listed in the lease to determine whether an event constitutes force majeure. Therefore, for an event such as the COVID-19 pandemic to be considered a force majeure event, the lease agreement needs to include a provision specifically addressing public health emergencies or epidemics as force majeure events.

Co-tenancy clause

Leases for retail space in malls or shopping centers may often include this clause. Because the traffic flow of people in the shopping mall and the occupancy level of the entirety of the rental spaces in the shopping mall will directly affect the tenant's business, the tenant may request permission to terminate the lease agreement under this clause if the landlord fails to maintain a certain amount of tenant occupancy.

Exclusive use clause

If you and the landlord expressly stipulate in the lease that the landlord promises to guarantee that you are the only tenant in this commercial space to sell or operate the product or service you are engaged in, then if the landlord rents space to your competitors, you may be able to terminate the lease with the landlord under this clause, or hold the landlord liable for breach of contract.

Bailout clause

This clause means that if the tenant's sales do not reach a preset level within a certain period, the tenant has the right to end the lease early. If the tenant and the landlord have such a clause in the lease, the tenant can walk out of the lease without legal consequences.

Sublet clause

If the tenant and the landlord agree on the right to sublease, and there is a special sublease or assignment clause in the lease, the tenant has the right to find a new tenant to continue the lease. The sublease process needs to be carried out in accordance with the provisions of the lease agreement. When a tenant encounters difficulties, being allowed to sublease can relieve the tenant of the heavy financial burden of paying the remaining rent, to some extent at least.

Frustration of purpuse doctrine

Not every lease will expressly state the frustration of purpose principle, but this principle is available to use. This principle can be invoked when unforeseen circumstances or events prevent the tenant from achieving the primary purpose of the agreement. For example, when the government's actions seriously affect the tenant's ability to carry out its business activities, this principle is usually adopted to negotiate with the landlord to terminate the lease. But tenants should understand that this principle will only succeed if the purpose of the lease is permanently unfulfilled, not just temporarily limited.

The above are some terms and principles of commercial leases that give the tenant the possibility of early termination of the lease. It's worth noting that even if you as a tenant do not have the above-mentioned clauses to rely on, you can still negotiate a plan to end the lease with the landlord, because the landlord also needs to solve the problem of the lease to reduce their losses, and the landlord has a legal obligation to mitigate your risk of default. If the landlord can re-let the leased space to a new tenant at a higher price, the landlord may also agree to let you out of the lease entirely after you pay a lump sum of compensation and rent. It is also possible that the landlord will make a reasonable effort to re-let the space, and it will be up to you to pay the rent until the re-letting is successful. Specific plans can be negotiated with the landlord. You can negotiate with the landlord yourself, or negotiate with the landlord through a lawyer who is familiar with commercial leasing, and strive for a fair and reasonable solution and outcome.

The above is a general introduction, and should not be construed as individual legal advice. For specific legal questions, please contact the Law Offices of Yu & Associates. Tel: 301-838-8986, Fax: 202-595-1918; E-mail: syu@yulegal.com, Address: 110 N. Washington St., Suite 328E, Rockville, MD 20850. (All rights reserved.)

Ó Yu & Associates LLC, 110 North Washington Street, Suite 328E, Rockville, MD 20850, USA. Tel: 301-838-8986