Best way to navigate getting out of an office lease


3

We signed a lease on office space but recently hit a tough stretch funding-wise and are trying to figure out a way to get out of lease as quickly as possible. Any suggestions for this? I guess if we were to find a new tenant than we'd probably get out (or if our landlord does) but other than that we probably have no choice but to keep paying. Is that correct? Any startups here who have successfully navigated this before?

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asked Dec 9 '09 at 06:08
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Tommy Maddox
156 points
  • do you have a "good guy clause" in the lease? – Tim J 10 years ago
  • Also, has anyone flat out walked away from a lease. Seems like not the right thing to do but if the circumstances call for it are there any huge red flags in doing so? (Other than obvious stuff like them sending you invoices for what you owe them.) – Tommy Maddox 10 years ago

6 Answers


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Technically speaking, the lease is a contract that you are obligated to fulfill. You can be sued if you break it. But landlords also know that winning a suit does not mean you can collect, especially if the tenant has no cash. Therefore, you may be able to negotiate your way out of your lease depending on what's going on with the local market and what kind of relationship you have with your landlord. (I'm assuming your business is incorporated and you didn't sign any personal guarantees for the lease?)

If the market is hot or you have desirable space, then your landlord might be willing to let you sublease (check your lease terms) or negotiate a buy out option where you pay them a penalty for terminating early.

If the market is soft and the landlord is reasonable, you might be able to have a candid discussion about your financial situation and work out some reduced or deferred rent arrangement or early termination. Remember, from your landlord's side he has to evaluate the cost of finding a new tenant, suing you if you just walk, and likely refurbishment and tenant improvement expenses to make the space attractive to a new tenant. If you're funding issue looks temporary, it might be more palatable for them to cut a deal with a known tenant. Note: this work's better if your landlord isn't some huge, corporate real estate company.

To answer Tommy's question, I have seen one "walk away" where we had two buildings and our CEO basically just pulled the plug on one of them when we hit a funding crunch. In the end, the landlord decided it was better to keep the rent coming from one building than having no rent and a lawsuit on his hand. But I'm not sure I'd recommend this form of brinksmanship.

answered Dec 9 '09 at 07:17
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Edwinoh
696 points
  • Thanks for all this. I have Googled it and the advice is pretty standard (see if you can get a sublease, check your termination agreement, etc.). I'm trying to get a sense of any insider info here, especially given the current real estate market. It seems like the best course is to go to the landlord, explain the situation and see what the options are. Walking away is something that I'd prefer not to do (unless the other options were extremely onerous) and I guess could be done even after talking to the landlord if there was little or no flexibility. – Tommy Maddox 10 years ago
  • This is all good practical advice and is roughly what I give to clients who are in the situation you are in. Two things you might want to check: Your lease might make it easier or harder to sublet or pass the lease onto another tenant. This could affect your bargaining position. Does your local legal system have any special rules that will affect you? In English law (where I practice) a landlord does not have to mitigate their loss by finding a new tenant. If you have a fixed term lease they can just hang on with the place empty after you have left and claim rent all the same. – Francis Davey 9 years ago

2

Generally the landlord has no incentive to let you out of a lease unless there's another company willing to take the lease, usually also to take it longer.

They don't have to sue you -- they can sick a collections agency on you which ruins your company's credit and looks awful to investors or later if you wanted to sell the company.

Your best bet is to find someone to take over the lease. Generally landlords do like to swap that out because it increases their chance of collecting rent without headache.

answered Dec 9 '09 at 07:31
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Jason
16,231 points

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I alway recommend my clients to just sit down and discuss the situation with the landlord. At the end of the day you are required to fulfill your contract, however if you do not have the funds to pay then you have three choices: 1. file bankruptcy and walk away, 2. sublease the space, or 3. negotiate some sort of lease buyout (obviously at a fraction of the cost of what you owe through the end of the term). In the end most smart landlords are better off recouping some rent as opposed to none at all, and they would avoid the expense of lawyer fees which don't guarantee that they would recoupe 100% of the rent due.

answered Jun 11 '10 at 12:14
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Nathan Smith
166 points

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Have you tried googling it? I searched for "how to get out of an office lease" and got a ton of seemingly helpful hits.

answered Dec 9 '09 at 06:17
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Gabriel Magana
3,103 points

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This must be terribly stressful for you and your business.

When leasing a space for a startup it is often the case that someone in the company has to personally guarantee the lease. Make sure that is not the case before just walking away or your will ruin that person's credit.

If you are completely out of funds and cannot meet basic obligations such as your lease perhaps declaring bankruptcy is an option.

Also, if you are at a point of walking away, definitely try talking to the landlord first. They may offer you options like moving you to a smaller space and reducing your rent, buying out your lease at a discount, or restructuring it in a way that would help you weather the storm.

answered Dec 9 '09 at 13:39
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Oleg Barshay
2,091 points

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Did you sign a personal guarantee for the lease?

I have intimate experience with a commercial (small business oriented) leasing company here in California. Contract fulfillment is a big issue for profitability for them. Signing the contract puts you on the hook for the full amount of the lease. They always get a personal guarantee with a lease and immediatley lein your home if you walk away or fall behind on lease payments. This puts them in control of you paying the lease until a suitable replacement tenant can be secured.

Their goal is stable revenue from the property. Yours at this point is to minimize expenses. So it's in everyone's interest to work together to secure a replacement tenant as quickly as possible. The leasing company that I'm familiar with appreciates this type of cooperation with lease holders.

answered Dec 10 '09 at 03:22
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Keith De Long
5,091 points

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