Negotiate Financially Favorable Terminations

Negotiate Financially Favorable Terminations

Unfortunately, some businesses, especially start-ups or local independent businesses, ultimately fail in the location where they’ve rented space. A move to less expensive space, space that would work better for a tenant’s business model, or space with more foot traffic or better synergy could salvage things. But it’s not that easy. While termination is sometimes the only way out, it shouldn’t be a foregone conclusion for troubled tenants.

If you’re hoping to find an answer besides packing up and moving out, consider these strategies. If you must leave, keep an eye on protecting your financial interests in the future. Avoiding termination of a lease due to the inability to pay rent and other attendant expenses may be as simple as negotiating more tenant-friendly financial provisions in new agreements.

Are Other Options Available?

Ending the lease isn’t always the answer. Keeping in mind the perils of termination due to financial stress, you should consider two alternatives. Ask the owner about entering into a Mutual Release and Termination of Lease Agreement through a sublet or assignment. Another approach is to send out a preliminary termination letter as a vehicle to negotiate a break-up fee. (This leads to a negotiation where the owner and tenant agree to settle the lease for a smaller amount than what’s owed.)

Get Better Deal the Second Time Around

Don’t be afraid to try to get a better deal by being a tough negotiator on new leases, or those you’re thinking of renewing. You absolutely must ask for your lease requests, such as an early termination clause, at the beginning of the negotiating process, preferably in the letter of intent. Early termination clauses greatly impact the financial benefit of a lease to an owner and shouldn’t be announced later—they are significant game changers that are crucial to arriving at an acceptable lease for the owner. Focus on:

Early termination clauses. These provisions allow a tenant to pull the plug on a commercial lease without a penalty when it wants to or needs to.

Favorable subletting or assigning. If an early termination clause is out of the question, aim for a good alternative: favorable subletting or assigning rights.

Kickout right. A kickout right is a provision in a lease permitting a tenant to cancel the lease in the event that the owner fails to comply with conditions, obligations, or standards defined in the lease, or if certain other events that have been negotiated by the tenant occur, poor sales.

For more information about how to negotiate termination provisions that work for you, see “Get Termination Right that Won’t Damage Business in the Long Term," available to subscribers here.