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There may be circumstance during which you as a commercial tenant may need to terminate the lease earlier than previously agreed upon. This can often be a very lengthy and expensive process, which can be made more efficient if the conditions of the option to terminate lease clause are carefully and effectively agreed upon by both parties.
The most common reason for wanting to terminate a commercial lease early is if your business is not succeeding as planned for. It may also be the opposite where business is going incredibly well and you require a larger space.
Your business could be bought out or the model may change which could require some sort of relocation.
Either way, it is important that before signing the lease you plan ahead and consider what conditions may be required in the case of needing to terminate the lease early.
Landlords often do not want to allow the option of terminating the lease, since it decreases the amount of money they are going to make and increases the risk of having vacant space, and therefore it is important you negotiate this before signing the lease and before occupying the space (when you have the most leverage).
Terminating a lease early comes with many nuances that need to be considered. The following points of negotiate are important:
There are circumstances under which the landlord may want to terminate your lease. If the tenant is showing that they are unable to pay the required rent, the landlord may seek to terminate the lease. The penalties that the landlord may want to seek need to be clearly stated in the option to terminate clause.
There are many conditions that are easy to negotiate with the landlord. In the case of a business, you may want to mention that if your income projections reach a certain goal by a certain time (6 months or 1 year for example) then you are able to cancel your lease.
Landlords will often want the tenant to agree to a minimum initial term that they must reach before being allowed to terminate. If the lease term is 5 years for example, the landlord may propose at a least a 2-year initial term.
If you still do not feel comfortable with that, you may request that the landlord allows you to agree to a 2-lease term; however, gives you the option to extend it during a certain period of time.
For example, the option to extend the lease may need to be exercised no later than 4 months before the end of the lease. You may also want to offer a buy-out, which is often difficult to negotiate. A landlord may only agree to a buyout if they are confident in being able to find a new tenant without any trouble.
There may also be a clause discussing subletting. This would be an appropriate option if you only plan to leave temporarily, or if there is a short period of time left on the lease term. If you are planning to leave permanently you could assign the lease.
This allows you to hand your lease over for the remainder of the rental term to another tenant. Both of these options need to be approved by the landlord.
If these options do not work with your circumstance and you do decide to terminate the lease, ensure that the conditions are negotiated carefully.