You May Feel Trapped in a Lease, But Escape Routes Exist
October 2002 – By Jack Garson. Print Article
No heat in your office?
Water leaking through the ceiling?
Insolvency preventing you from paying rent?
There are escape hatches in nearly every lease that allow you to terminate it.
A high-tech company was in arrears in its rent. Because its business contracted, the company wanted to reduce its space by 50 percent. The existing rent was well in excess of current market rent due to the recession.
After scouring the lease for an economic escape hatch, it appeared the landlord had erred in drafting it. If the tenant suffered any one of a number of “insolvency” events, the lease would automatically terminate. The lease should have provided for termination at the option of the landlord.
Fortunately for the tech company, one of the insolvency events was easily triggered. Because of financial difficulty, the tenant was justified in declaring it could not pay its bills as they became due.
We notified the landlord, which led to automatic termination of the lease. Considering the softness in the real estate market, the landlord agreed to forgive all past-due rent if the tenant entered into a new lease at a lower rent for only the portion of the premises the tenant wanted. Mission accomplished.
At some point, almost all business owners wish they could terminate their lease. Your business may be growing or contracting. The landlord may be breaching the lease. You may need to relocate or have any number of other reasons to terminate your lease.
Invariably, you assume your lease can’t be terminated. Wrong.
The lease itself or the surrounding circumstances may provide a way out.
Recently, a tenant faced a nightmarish scenario in which the landlord was effectively preventing the tenant from using the premises.
The landlord had begun a massive, multiyear renovation at the Washington office complex where the tenant had been leasing for several years. The tenant was a prominent international educational institution providing classroom instruction on the premises. The renovation involved jackhammers and other construction equipment that interrupted classes and prevented students from hearing instructors.
After researching cases regarding constructive eviction, we built a case demonstrating that the landlord’s activities so significantly interfered with the tenant’s classes that the institution was entitled to terminate the lease.
With the help of expert witnesses, a sound-measuring device and statements from students and instructors, we verified the interference caused by the construction. All the evidence helped demonstrate that the tenant could prove in court the landlord had “constructively evicted” the business, justifying not only termination of the lease but also payment of the tenant’s relocation costs.
The outcome: a full release from all lease obligations, return of the security deposit and a six-figure payment from the landlord for the tenant’s troubles.
In other disputes, tenants have escaped from their lease obligations when:
- Water leaking through the roof of the tenant’s office premises rendered them useless to the tenant. Presented with a videotape showing a heavy flow of water streaming through the ceiling tiles as if a garden hose had been turned on full blast, the landlord released the tenant from the lease within 24 hours after receiving the videotape.
- No heat in a tenant’s office suite justified termination of the lease. Our videotape showed employees wearing winter coats and recording the fog their breath created inside the premises. Again, we proved the premises could not be occupied and the tenant was entitled to terminate the lease.
- An eye doctor faced bankruptcy at his Rockville location. We showed the landlord how bankruptcy law would enable him to terminate his lease obligations and limit his obligation for future rent to no more than the greater of one year’s rent or 15 percent of the remaining rent due under the lease. If the doctor filed for bankruptcy, the landlord would recover little, if any, rent. The landlord agreed to release the doctor from his lease in exchange for the security deposit and a quick departure. Both parties avoided expensive litigation, and the tenant avoided the stigma of bankruptcy.
- A franchisee of a prominent regional fast-food chain was in a mall that had lost key tenants and significant customer traffic. When the mall owner opened a food court that attracted fast-food customers, we found using a 40-year-old case as precedent the landlord had violated an implied obligation of good faith and fair dealing by introducing so much competition it destroyed the tenant’s business. The landlord agreed to release the franchisee from the lease for only a small fraction of the rent otherwise payable.
All of these situations demonstrate there are opportunities to extract yourself from even the most formidable lease with knowledge of the case law, detailed review of the lease provisions and mastery of the evidence.
Landlords and tenants are generally compatible businesspeople. Unforeseen circumstances sometimes require, however, that tenants flex their muscles, enlist good advisers and move expeditiously to limit their liability.