Mar 3, 2021

It’s been a while since I wrote about commercial leases, but I wanted to finish up my series by discussing use, maintenance and repairs, and subleasing. If you’re interested in my last articles, you can find them here.

Use

When I discuss use in the context of a lease, I’m referring to the way that a tenant is allowed to use it’s space. Technically, a lease allows you exclusive possession of a space to use as you like, but most leases limit your use to something reasonable for the building.

For example, I have an office in a bank building. There are other offices in the building. I’m permitted to use my space for any reasonable office function. I happen to run a law firm, but I could be an accountant or architect or something similar. I cannot open a glass blowing studio. That would require serious changes to my space that are not permitted by my lease.

Other specific uses might be outright banned by a lease. For example, it’s common for a retail lease to ban using the space for a second-hand resale shop. That’s because the landlord wants to project a certain image of its tenants and a resale shop might detract from that image.

Dangerous uses are usually banned as well. No storing dangerous items, for example. You’ll also see provisions banning strip clubs and adult book stores. The image is a problem, but there are also liability issues associated with those locations.

Maintenance and Repairs

Who is responsible for maintenance? This is a hot topic among clients. It usually comes up when something breaks. That’s when a tenant learns that they are on the hook for a new furnace or HVAC unit. A tenant should always review this section of the lease very closely, and if they’re responsible for maintenance of big-ticket items, they should learn about how old those items are and factor the cost of repair or replacement into the cost of their lease.

Generally, the larger your space, the more you’ll be responsible for. If you rent a small office, you might not be responsible for anything. My building pays for lightbulbs, for example. It’s common to be responsible for anything directly within your unit. If you have a bathroom, you’re probably responsible for unclogging it, etc. Normally, you don’t have to pay for items that are shared between units, like an HVAC unit. However, landlords try to add these things in whenever they can.

If you rent an entire building, you’re probably responsible for much more. This is especially true if you have a longer lease. Furnaces, HVAC, and plumbing are all usually your responsibility. Therefore, as the tenant, you should inspect those items to determine what repairs or replacement will be necessary and budget those costs into running your business.

Subleasing

Subleasing is another hot topic because most leases explicitly say you cannot sublease your space. Tenants don’t usually notice these provisions until they want to sublease. Then it becomes a problem.

Almost every lease says that the landlord must approve a sub-tenant, but there is usually another line that states that the landlord shall not unreasonably withhold its approval. Sometimes landlords remove that line, but the courts will still hold them to that standard. The landlord can’t turn away a reasonable sub-tenant.

The original tenant is usually still on the hook if the new tenant doesn’t pay. That is standard. Therefore, you should not bring a sub-tenant who you don’t believe will pay the rent. You could be on the hook for two leases if you’re not careful.

The other thing to consider is that if you bring a new tenant to a building and want to break your lease, they pretty much have to accept the new tenant as a sublessor because suing you for unpaid rent will be extremely difficult. This is due to a legal concept known as a duty to mitigate damages. If I break my lease, you can sue me for the unpaid rent until you found a new tenant and for the difference between what I should have paid and what the new tenant is paying. A landlord can’t just leave a space vacant. They have a duty to release the space in order to reduce their damages. If you literally bring them a new tenant, they have to accept it so long as it’s reasonable because if they don’t, they are failing that duty.

Conclusion

I have posted four articles about commercial leases covering all sort of topics. I think this will be my last one, but if you have any specific questions about leases or anything else, please free feel to reach out to me at john@johnfbakerlaw.com.

Jan 20, 2021

The pandemic has been very hard on small businesses, and many won’t survive. Our firm is offering a Covid Escape Plan, which allows business owners to wind-up their operations and close shop. As part of that process, we negotiate with creditors. Creditors can be landlords, vendors, franchisers, and/or banks. The goal is to reduce the liability owed by the business so that the business owner can cease operations without an impact on his or her personal finances.

I think there is a bit of a misconception about how the process of negotiating with creditors works. Many individuals believe that I can make a quick phone call and resolve the bill for pennies on the dollar. Unfortunately, that is never the case. Creditors can be very difficult to work with and rarely offer hefty discounts.

How much of a discount can we expect?

There is no exact figure as to the amount of discount you can expect. I find that it is much easier to negotiate large settlements, as opposed to small ones. For example, it would be much easier to negotiate a settlement for a business that owes $80,000 to their landlord than a business that owes $2,500 to a vendor. I have no idea why this is. I imagine it’s because the amount someone is collecting is a motivating factor towards settlement. If I owe you $80,000 and I offer you $40,000 today, that’s $40,000 in your pocket. You can do a lot with $40,000 so you might be tempted to take that offer. This is especially true when creditors often owe money to other people, which is frequently the case during these trying times.

Compare that to a circumstance where I owe you $2,500, and I offer you $1,250. There probably isn’t much you can do with $1,250 right now. You’re likely to hold out for the full amount because the risk is fairly low given the small amount owed.

Also, consider what a collections firm gets as part of the deal. Collections firms frequently take 33% or more of what they collect. Therefore, my $1,250 is only $825 – not an inspiring settlement.

As a general rule, I usually shoot to get a settlement of around 50% of what is owed. Sometimes you can do better, but it is rare. Normally, bills settle for 25%-50% off. Please understand, that figure may not apply to your business. Every case is different.

I also want to mention that discounts are usually only available when your business is actually struggling. If you’re doing ok but hoping to save some money, creditors can usually see right through that. They may ask for proof of your struggle if they sense you’re not being truthful. Remember, these people are almost never stupid, and, as a rule, I never assume they are.

If you make a reasonable offer and negotiate in good faith, you can usually reach a favorable settlement.

What does the process of settling bills look like?

My process differs depending on the number of bills outstanding. If you owe many different creditors, I usually start the process by sending letters to each creditor with our starting offer. This offer is usually pretty low, and the letter spells out why we’re struggling and how we owe a bunch of people.

If you only owe one creditor or that creditor is a sophisticated negotiator, like an attorney, I will call them. I can usually discuss the issue with them one-on-one and cut through a lot of the bullshit. That’s not to say they will negotiate a lower settlement; it just means that we can reach an agreement slightly faster.

Once I have made my initial offers, we usually have to wait for responses. Frequently, we’re dealing with middlemen who need to take the offer to their client or boss. Some people respond very quickly – say, in a week. But other organizations are extremely slow and can take two to three weeks to respond. Once we have a response, there is usually a bit of a back-and-forth until we reach a reasonable settlement. There is no magic to it. We just put in the time, working to get the creditor down to a number that makes sense to our client.

Once a settlement is reached, we need to prepare releases for each creditor. It is imperative that a release gets signed for each settlement. No checks get sent until the creditor releases our client from liability, in writing. Trust me, it makes everything easier in the end. The process of drafting and sending releases doesn’t take long, but we frequently wait a week or so for signature from the creditor.

The entire process usually takes four to six weeks to complete, depending on the number and reasonableness of creditors.

It also makes life a bit easier if you were current with your collectors prior to the slowdown. I find that people are much more willing to work with businesses that were good partners before the pandemic. If you have been avoiding bills for years, you probably won’t get much sympathy now.

Dec 9, 2020

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.

Conclusion

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 john@johnfbakerlaw.com.