Got more space than needed? Tips to wiggle out of a lease

Recently, we represented a tenant in a successful lease transaction.

The new location offers ample space and amenities for years to come and is one of four occupied by the company. So, now we’ve been approached by this client to review their other three buildings.

You see, an acquisition of a competitor is in the works. Thus, there could be a redundancy of capacity very shortly. Our counsel to them was column-worthy. So, we mashed up an old column on the subject along with an update on the new information.

If you find yourself in any of the following scenarios, consider your alternatives:

Your company was just bought and the operation will be rolled into another location.

Or, you’ve outstripped the capacity of your facilities but have time remaining on an existing lease.

Or, you have decided to shutter the operation and outsource the manufacturing to Texas but your lease expires a year from now.

Or, you decide to take advantage of historically low interest rates and buy a building, but there is that landlord who wants to receive her rent for the next two years.

ALL of these situations and more can cause the need for lease termination. But, just how do you accomplish this?

First, ask yourself these questions:

How much time remains on your lease? If the term remaining on your lease is less than two years, be prepared for the owner to use the remaining term as “free” marketing time. The owner has the luxury of rent payments while searching for a replacement tenant or buyer.

What type of entity owns your location? A private individual may be a bit more flexible than an institutional owner such as a pension fund adviser or a REIT (real estate investment trust).

Where is your rental rate in relation to the current market? If it’s an above-market rate, plan on subsidizing payments on the remaining term, if a replacement tenant can be found. If your rate is below market, the remaining term could provide a good alternative for a fast-growing company concerned about a long-term lease.

Does your lease allow fo assignment or subleasing? (Most do.) Rarely is there a removal of your obligation, however. This means that if you sublease or assign the remaining term, you may still be liable for the payment of rent if the sub-tenant defaults.

If you are moving to a bigger space, what is the rent amount monthly? If you are doubling or tripling in size, one month of rent in the old building could be a fraction of the monthly rent in the new location. IE: Old rent is $5,000 per month. New rent is $15,000 per month. There are nine months of term remaining in the old digs or $45,000. If you negotiate three months of rent abatement in the new unit, you avoid a double payment.

How long would your building take to lease? Any competent commercial real estate broker can answer this for you. The answer to this question will have a bearing on a lease buyout.

Can some portion of the operation stay through the term? I just sold a building to a company with 15 months remaining on a lease term. Rather than try to sublease the space or negotiate a buyout, my client elected to open another related operation in the space.

Are any of your neighbors crowded and in need of square footage? A fast-growing neighbor can consume your space with a moment’s notice – and thank you!

Once these answers are clearly understood, you have some options:

Negotiate a buyout: I generally will suggest an occupant call his owner and discuss the reason the space is no longer needed. I suggest the occupant ask the owner if she would consider a buyout of the remaining term and if so, for how much?

Depending on an up-trending or down-trending market, the owner response will vary. Assuming 12 to 18 months of term remain, an owner will generally compute the marketing time to find a new tenant, lease concessions (free rent and improvements), brokerage fees, and the variance of the current rental rate to market. All of these factors form the basis of a buyout offer.

Sublease or assign the space: If more than two years remain on your lease and unless you are dramatically below market, most owners will not consider a buyout of the remaining obligation. You then must find a replacement tenant to live out the remainder of your lease term. You can either do this yourself, hire a commercial real estate professional or ask the owner to do it.

Cease payment: I have NEVER recommended this but it is an alternative.

Live out the term: In the example above, my client loved the old location so he created a business operation to house the space and live out the remaining term.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104

Source: Orange County Register