The coronavirus pandemic has upset nearly every aspect of the way the world does business. Most non-essential businesses in the Philadelphia area have started to operate remotely since the pandemic hit. Non-essential employees have been telecommuting from home. Many retail companies have shifted to delivery only.
Depending on the severity of local COVID-19 outbreaks, some non-essential businesses have even had to shut down completely under county or township law.
What do you do when you’re tied to a commercial lease for space you can no longer use? Many businesses have had to cut costs as revenue has fallen. A high rent payment on your balance sheet now could jeopardize your company’s survival.
Business owners facing these types of drastic changes are justified in wanting out of their commercial leases. Can you get out of your lease because of the pandemic?
The answer is: possibly. Most commercial leases require that you pay a penalty fee for early termination. But landlords haven’t been immune to the effects of the pandemic. If your commercial landlord faces a high number of vacancies with a low chance of finding new tenants anytime soon, they may be more willing to negotiate better lease terms for you.
Every commercial lease is unique. The only way to know your options is to go over the actual terms of your lease – preferably with the help of an experienced local business lawyer. Holmes Business Law Firm is dedicated to getting the best terms possible for our clients. Call the Philadelphia offices of Sarah Holmes today for a consultation at 215-482-0285.
Important Terms for Terminating Your Commercial LeaseWhen reviewing your commercial lease, look carefully at any language discussing how your lease could end. Clauses to look for include:
- Lease Term – How long do you have left on your commercial lease? Your approach may differ if you have only a few months remaining versus a year or more.
- Early Termination – Your lease may actually include a clause outlining terms for early termination. If so, you must follow the procedures laid out as closely as possible. When do you need to send your notice of termination? Who do you need to send it to? Can you communicate your notice by email or does it have to be mailed to a specific address? If you don’t follow the proper method, your landlord may refuse early termination.
- Security Deposit – How much did you put on deposit? Normally, if you break your lease before it ends, you lose your security deposit. In some cases, your landlord may agree to offset the cost of your rent with your security deposit.
- Continuous Operation or Abandonment Clauses – Commercial landlords want their tenants’ businesses to stay open, especially in large shopping centers. As a result, many commercial leases require minimum hours of operation. If you’re unable to meet those hourly requirements for a certain period of time, your landlord may declare a default and take over your lease. Because of COVID-19, you may not be able to meet the minimum hourly requirements outlined in your lease. That may affect your negotiations.
- Landlord Services and Amenities – Lease agreements go both ways. Landlords have obligations just like tenants do. Your commercial landlord may be responsible for cleaning, maintenance, air conditioning, security, parking, or common areas. If your landlord is unable to provide these services during the pandemic, you could request a rent reduction or abatement. You could also negotiate lower common area maintenance (CAM) charges each month based on saved costs.
- Force Majeure Clause – Many contracts, including commercial leases, have force majeure clauses. A force majeure clause can excuse you from your lease based on major circumstances that are out of the control of either you or your landlord, such as natural disasters. For more information on how force majeure can affect your business in the time of coronavirus, check out the next blog post in this series.
- Commercial Frustration – Your lease may include a statement of purpose or the purpose may be implied. If government action in response to the coronavirus makes it impossible for you to fulfill the purpose of your contract, you could argue commercial frustration. This argument would be the most successful for businesses unable to operate at all versus those operating at partial capacity (e.g., beauty salons or gyms versus restaurants with outdoor dining options).
- Personal Rent Guarantee – Many commercial leases include a rent guarantee provision that requires the business owner to personally pay the rent if the business does not. This could make you vulnerable to personal liability.
- Landlord’s Lien – In some cases, your landlord may hold a “lien” or security interest in your physical business items located at the property. That could cover office chairs and desks, computer equipment, or even your own products stocked at your location. Your landlord could take these items as collateral if you break your lease.
- Subleasing – If you’re unable to get out of your lease, you may be able to sublease it to a subtenant. You may or may not need your landlord’s consent to sublease. Even if you’re unable to find a subtenant to pay full rent, you could offset some of the cost.
- Waivers and Amendments – Your commercial lease will normally have terms for managing waivers and amendments. Most leases require waivers and amendments to be in writing. Lease amendments often need both the landlord and tenant to sign.
Negotiating a Commercial Lease Termination with Your Landlord
Your commercial landlord may be sophisticated and experienced, with many properties and lease agreements. They may be represented by professional property management companies. When approaching your landlord about terminating your commercial lease early, you must be prepared to back up your request with financial documentation and proof of hardship.
At the same time, you have to consider that your commercial landlord may not necessarily have deep pockets. They also have bills like payroll, utilities, and taxes. Their property may get foreclosed if they fail to make their mortgage payments on time.
As a result, a commercial lease early termination can be a delicate negotiation. Even if you’ve had a good relationship with your landlord in the past, you don’t want to ruin it now.
To get the best results for your business, you should evaluate where you stand legally and financially with an experienced business lawyer. Consider:
- Are you currently in breach of your lease?
- Are you able to continue business operations on-site in any capacity?
- Can you defer rent payments until your business starts back up?
- Can you afford to pay rent at a decreased rate?
- Does your landlord have a security interest in any of your business property?
- Would you be personally liable for rent if your business doesn’t pay?
- Do you or your landlord have insurance that covers business interruptions?
- Are there any government relief or aid programs available to you?
- What is your business plan moving forward?
- Considering your situation, is lease termination the best option?
At Holmes Business Law, we help you set your financial goals before going into the negotiation with your landlord. We provide creative solutions for you to navigate the shifting COVID-19 landscape based on the needs of your business now and in the long-term.
Call our Philadelphia area law offices now at 215-482-0285 for a consultation with an experienced lawyer dedicated to helping your business thrive.