How to Get Out of a Bad Lease
Leases and labor are two of the biggest costs for many businesses. In this Great Recession, companies have already made painful cuts in staff but often view their leases as inescapable handcuffs – burdens that can’t be cast off.
For almost 30 years I have worked with a variety of businesses and their real estate brokers to engineer escapes from leases. The lease extraction strategies fall into three broad categories:
- Bad Landlords
- Nothing Left to Lose
Finding a technicality that will extract a tenant from a lease is a bit like winning your office NCAA basketball pool. It’s not impossible, but don’t count on it for the rent money. Still, over the years, we’ve helped a surprising number of businesses to this successful outcome. In one case, we got a tenant out of the lease where the landlord left out a critical piece of the deal. The parties signed the lease but failed to include the space plan – showing the key features of the premises. Instead, the landlord left a blank page, labeled “Exhibit D,” for this plan. The parties agreed to design the space after they signed the lease and then attach the plan later. But until they completed that plan, they merely had an agreement to agree, not a binding deal. Legally, the absence of the space plan was a fatal flaw – and we were able to terminate the lease.
In another case, the parties failed to establish a date – or a way of determining – when the lease would start. This one happens all of the time. But the law frowns on fuzzy or missing contract terms – especially when they go to the heart of the deal. In virtually every state, the lease must say: what is the rent, where is the premises and, drum-roll please, when will the term begin and end. So, once again, we yanked some fortunate soul out of a bad deal.
Surprisingly, in many cases, you have your best opportunity to kill a lease if you never move into the space. For example, in a number of states, the amount of money you owe the landlord is dramatically reduced, sometimes down to zero, if the tenant walks away from a lease before the deal starts. Recently, we used this situation as leverage to renegotiate a lease that a tenant could no longer afford. How, you ask? Very carefully. Work with a professional before trying this one at home.
In other cases, you have a perfectly binding lease, but the landlord fumbles the ball and unintentionally releases the tenant. In one case, our client signed a lease for premises in a shopping center, but no longer wanted the space. The tenant notified the landlord. The landlord was still building out other stores and began keeping construction supplies in the premises our client had leased. Little did the landlord know that by using the space – the landlord legally released the tenant from the lease. We brought this surprising fact to the landlord’s attention and swiftly terminated the lease. The list of lease-busting scenarios goes on. But in all of these cases, you need a lot to draw on – experience with these cases can turn seemingly hopeless situations into a ticket out of a bad lease.
All too often, tenants feel powerless to escape from bad landlords and leases. Tenants are pessimistic because typical leases often prohibit termination despite outrageous conduct by their landlord. Still, we terminated leases – despite lease provisions to the contrary – in the following situations:
- The landlord was engaging in a lengthy repair program using jack-hammers outside our client’s space. The tenant’s employees couldn’t think, much less conduct business. At the negotiation to discuss terminating the lease, I played a recording of the jack-hammering while the landlord’s attorney pitched his case. No one could hear a word of his argument. Point made. The landlord not only let us out of the lease but gave us a fat check to pay for the tenant’s relocation.
- In another case, the tenant had been complaining of serious roof leaks for months all of which the landlord ignored. During one particularly heavy rain storm, the water poured into the premises like someone had put a garden hose in the ceiling and turned on the water full blast. We sent a video of the indoor downpour to the landlord’s senior executives. Within days, our client was released from the lease.
- In several cases, our clients had suffered through erratic HVAC systems that the landlords could have repaired, but repeatedly failed to do so. In one case, we meticulously recorded 55 degree temperatures in part of the space and 88 degrees in other parts. In another situation, we videoed employees wearing overcoats and frosty breath coming out of their mouths as they exhaled and spoke. In both cases, we were able to terminate the leases.
The list goes on – don’t even ask me about the case of the dead rats trapped in the tenant’s walls and the nickel-sized flesh-eating flies that found them.
Gory details of uninhabitable space help your case. But in virtually all of these situations, the lease gave the tenant no right to terminate the lease – under any circumstance. A combination of critical facts and finding the right court case or state law, which can often be a needle in a haystack, can provide the ammunition to terminate even the most pro-landlord lease.
Nothing Left to Lose
Sometimes a tenant’s own dire circumstances enable the tenant to walk away from a lease. Of course, bankruptcy provides a well-known escape hatch. Generally, a tenant can terminate a lease in bankruptcy and limit its liability to one year’s rent – sometimes less. But bankruptcy is expensive and intrusive. The tenant spends a small fortune and needs approval for most business decisions – paralyzing operations and putting the company in a death spiral.
That’s why what I call “abandoning the car beside the road” often works better, as a practical matter. Here, the tenant shuts down its business and – without using any of the company’s assets – the owners form a new business. Sometimes landlords will attempt to pursue the new business for payment of the old rent. But often, they don’t throw good money after bad. And even if they do chase you, landlords rarely collect if you follow the proper precautions.
There are other techniques for extracting your company from a bad lease. In fact, with advanced planning, you can dramatically enhance your ability to build escape hatches into your leases. In my next article, I’ll share with you some thoughts about what to make sure you include in your next lease. No sense jumping out of a frying pan and into the fire.