Lately, I have received a number of questions about breaking leases. Unfortunately, many businesses are struggling right now due to COVID, and some are looking to shut down. The trouble that many are facing is that they have years remaining on a lease and they are concerned about the liability they might have if they walk away.
There are essentially three ways to end a lease: (1) normal end date, (2) negotiating the remainder of the lease, and (3) walking away from the lease.
The key to remember as a small business owner is that you have likely signed a personal guaranty as part of the lease agreement so whatever decision the business makes will affect the owner personally.
Normal End of the Lease
Every lease has an endpoint. Sometimes that endpoint is a clear date, but other times, the agreement specifies that the lease is month-to-month. When the lease specifies an end point, you can simply allow the lease to end at the predetermined time. Obviously, you should be moved out and be prepared to turn over the premises on that date.
When the lease is open-ended, like a month-to-month lease, you can end the lease by providing sufficient notice to the landlord. What is sufficient notice? You have to give notice equal to the length of time between rent payments. For example, if you pay your rent monthly, the law requires notice of at least 30 days to break the lease. If your lease if for an extended period of time, technically you should provide more notice, but most courts will agree that 30 days should be sufficient notice.
You should provide notice in writing. An email or text does constitute writing, but I recommend sending a letter via email and sending it certified mail, that way you have a receipt. Keep any correspondence between you and the landlord in case the landlord later claims you didn’t provide adequate notice.
Negotiating the Remainder of the Lease
If you have a long time left on your lease, your best option will be to negotiate it with your landlord. Under the law, you are obligated to pay the lease till the end, but if you leave the landlord has a duty to re-rent the space to mitigate damages. Therefore, most landlords are willing to settle the lease for an amount equal to the time it will take them to re-rent the space.
For some locations, the landlord may have another tenant ready to go. Therefore, settling the lease should be very easy. Unfortunately, that is rarely the case right now. I usually recommend settling a remaining lease for between three and six months of rent, depending on the difficulty in finding a new tenant.
If you do settle the remaining lease, make sure to get the agreement in writing. The last thing you want is for the landlord to claim you owe more than you do. Ideally, the agreement will specify an exact amount of money and when it is due. Most landlords will want the settlement in a lump sum so be prepared to pay it all at once.
Breaking the Lease
This is the least desirable option because it will likely end in a lawsuit. Your landlord can sue you for the rent remaining on the lease plus any costs they incurred in coming after you. Realistically, the court will not award the landlord more than a few months of rent – enough time to find a new renter. Even if you have five years remaining, the court is unlikely to enter a judgment for that amount.
The other concern with this plan is that it will cost you attorney’s fees to defend yourself in court. This works out fine for the lawyers but just ends up costing you more. You are always better off to settle before a lawsuit.
However, sometimes it’s unavoidable. Some landlords can be very difficult to deal with. I understand where they are coming from. They have costs, too. But I generally recommend that my landlord clients work with the tenants to resolve the outstanding lease. A lawsuit is almost never a benefit to anyone but the lawyers. With that said, sometimes it is necessary.
Before you walk away from a lease, you should try to negotiate the remaining rent with the landlord. If the landlord won’t cooperate, you might need to bring in a lawyer.
COVID has hit so many businesses hard these last few months, and I expect there will be more trouble to come. We are currently offering a COVID Escape Plan, where we negotiate with all outstanding creditors, including landlords, so that business owners can close their business without the threat of personal liability and bankruptcy. If your business is in trouble, don’t go down with the ship. Give us a call at (630) 801-8661 or email us at email@example.com.