How to negotiate an early exit from a lease

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By Dan Emerson
Dolan Media Newswires

The process of negotiating an early exit from an office lease is akin to a poker game, said David Buyse, a partner in Minneapolis-based Corporate Tenant Advisors.

If the office market is relatively robust, it’s easier for a landlord to find a replacement tenant. But, Buyse cautioned, “There’s not a landlord in town who will tell you the market is in their favor.”

As the tenant trying to leave, “you want to let the landlord know you want to get out of the lease,” he said, “but you also want to let them know you are not desperate and are willing to consider other options.”

“Portrayal of attitude” is important, Buyse said. “If you come across as desperate, get out your wallet. But if you come across as confident, with many alternatives, be prepared for an easier negotiation.”

The two most common reasons office tenants may request an early exit are they have outgrown the space and need more room, or their business has been substantially diminished in size or is going out of business, according to Jim Vos, a principal with Cresa Minneapolis, a tenant representation agency.

The landlord’s response “is predictably different in each case,” Vos said. “If you’re outgrowing the space, the landlord will typically say, ‘You must be making money, so you have an obligation to write me a check.’ Conversely, if you’re running out of resources or folding, the landlord may be a little more sympathetic.”

Minneapolis attorney Karl Yeager recalled a recent client with two years left in a lease and a need to exit. The small service company had downsized to the point it was only using a fraction of the office space. At the original lease signing, the tenant had put down a security deposit that represented “a sizable portion” of the remaining lease payments.

The tenant also had signed a personal guarantee, according to Yeager, head of the real estate practice group at the Minneapolis law firm of Meagher & Geer PLLP.

The landlord agreed to forgo the guarantee and let the tenant vacate early in exchange for the security deposit. The landlord soon found another tenant, and “the early termination worked out great,” Yeager said. The landlord’s ability to find a replacement tenant relatively quickly was a major factor in forging an exit agreement, he noted.

Office tenants also sometimes seek an early end to a lease because the landlord failed to live up to the obligations stated in the document. For example, a tenant believes the landlord was negligent in not fixing a leaky roof, which resulted in a space that is unusable or less usable.

But those situations, which often end up in court, are relatively rare, experts said. In most cases, getting out of a lease early is a matter of negotiating a settlement acceptable to both parties.

When entering a negotiation, tenants need to know all their obligations to the landlord to determine the options available for early termination, Vos said. Some leases are more tenant-friendly; others are more favorable to the landlord’s interests.

The original lease may include options such as subleasing or assigning the space. By definition, subleasing covers any period of time less than the remaining term of the lease; an assignment is for the remaining term of the lease.

When negotiating any lease up front, it’s sometimes possible to include a clause that allows the tenant more leeway to make an early exit. A lease also could include an option to reduce the amount of space leased sometime during the term of the lease.

But contraction rights are not as common as they once were, Vos said. In today’s market, landlords rarely agree to contraction rights, and when they do, it’s typically to large, multi-floor tenants with exceptional credit.

Some office leases include termination clauses that give a tenant a one-time right to leave early — for example, after three years of a five-year lease — in exchange for paying a penalty. Even so, landlords are typically “very reluctant” to offer termination clauses, Vos said.

For a tenant who needs some concessions but isn’t necessarily on the verge of going out of business, a landlord might be willing to relocate the tenant to other space in the same building or to a less expensive space in another building the landlord owns, Yeager noted.

If a lease with a corporate tenant does not include a personal guarantee, the landlord may have more incentive to work out an agreement to keep the tenant in the space, Yeager said. In that case, the landlord might offer a rent reduction.

Market dynamics often come into play. If vacancy rates are tightening and the market is becoming more favorable to landlords, that may give a landlord leverage to charge the next tenant higher rates. If so, “the landlord may have an incentive to work something out to let the tenant out early and get someone else in there to pay higher rent,” Vos said.

No matter the circumstances of negotiating an early exit, a good tenant rep needs to work at cultivating long-term business relationships with landlords, said Buyse of Corporate Tenant Advisors.

While the tenant might have a one-time situation, the rep should “approach the landlord as a repeat customer who is going to be enthusiastic about recommending him to future tenants,” Buyse said. “That way, you frame it as a good business decision,” for the landlord.