By: Richard E. Korb©2011[1]
A commercial lease allows a tenant to rent a property for a business. They differ from residential leases in that residential ones pertain to one’s home-whether it is a house, an apartment, a condominium, etc. Besides this, commercial and residential leases differ in the following ways:
- Commercial leases generally span for longer periods, making them harder to modify or nullify because commercial tenants, commonly referred to as lessees, are legally bound to the terms of the leases (such as rent and management)
- Residential leases generally contain more provisions to protect the lessee’s rights such as privacy, whereas commercial leases generally protect the lessor’s (property owner) rights
- Commercial leases do not contain any standard forms; instead lessors draft the leases and they are often one sided
With the recent economic downturn, many lessees are having difficulty paying monthly rent dues for their commercial rental property. This is because many businesses are unable to meet profit goals, which leaves them incapable. When in this position, lessees have multiple options in either modifying or terminating their commercial lease.
The best strategy a lessee can take to avoid major problems down the line is to take precautions before signing the lease. First, a lessee can ask to add provisions to the lease that would allow him or her to modify the agreement or terminate early, if needed. Doing so allows for clear direction in the event the lessee needs lease modification because both parties have already agreed upon the terms for modification. Discussing modification and termination procedures with the lessor before signing a lease is highly recommended.
Second, a lessee can sign a lease for a shorter amount of time, allowing him or her to see if the business is profitable on the property. Signing a shorter lease gives the lessee the option of vacating the premises if needed. It is better to sign a lease for a short amount such as two years of time than to sign a lease for a longer period, such as more than five years. Consider the following situation: a small business owner signs a commercial lease for five years on a property. However, after the second year, it is evident that the business cannot make enough revenue to pay rent and goes bankrupt. Although the small business owner no longer operates his or her business on the property, he or she may still be liable for rent for the remaining three years on the lease. Signing a lease for a shorter period helps a business owner in case of emergency
However, if the lease contains no modification or termination procedures, the requesting party has a number of options. The first and most obvious is simply asking for modification or early termination. Often times, a property owner and a lessee strike up deals when the lessee can no longer afford rent, but has time left on his or her lease of the property. If you have a history of paying rent dues on time, your lessor may be lenient and willing to compromise the lease.
Another option is to rent out your rented property. A lessee can either sublet or assign the property until the lease terminates unless the lease specifically prohibits any subletting or assigning of property to a third party. Subletting a property means that a lessee transfers a portion of the property in the lease to a third party. On the other hand, assigning a property means that a lessee transfers all of the property in the lease to a third party. In either case, this third party will rent property from the lessee, and assist with rent payments to the lessor. It is important to note that a lessee cannot sublet or assign the property for a longer time than the time written on his or her lease. Furthermore, the lessee cannot sublet or assign more than the property that he or she is renting, which the lease notes. Remember that lessees are still liable for rent payments and their obligations listed in the lease, even though they have sublet or assigned the property to a third party.
The third method by which a lessee can terminate his or her lease is if the lessor violates the terms of the lease. If, for example, the lease prescribes that the lessor be financially responsible for maintenance of the property and he or she has failed to uphold this obligation, the lessee may be eligible for early termination of his or her lease without excess fees.
Terminating a commercial lease is complicated matter; the prerequisites for it are vague and situation-specific. When a lessee needs to terminate his or her lease, the lessor takes matters such as the terms of the lease, the particular business leasing the property, and the amount of rent charged into account. For dependable and insightful advice, please call turn to an experienced attorney, Richard Korb. 510-524-0903 for a free consultation to discuss your situation and your best options and strategies.
[1] RICHARD E. KORB is a seasoned attorney with 30 years of business and real estate litigation and transactional (contracts) experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, bankruptcy and general civil law and he has drafted and negotiated over 250 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters. In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. ©2011 Richard Korb
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