The sudden prevalence and popularity of remote work has reshaped how much office space companies need. With many businesses locked into long-term lease agreements but with fewer needs for commercial space, many companies are stuck paying for empty square footage. If your business is carrying more office space than it uses or expects to utilize in the short or long term, or is otherwise downsizing due to hybrid or remote work, legal options are available to reduce that cost without waiting years for the lease to expire.
Start With the Lease Itself
It may sound obvious, but evaluating the lease is the first place to look. Many commercial leases include a negotiated early termination clause, sublease options, or an option to surrender a portion of the tenant’s space at a predetermined point in the lease term. However, these provisions often come with specific notice periods, fees, or other conditions attached. Before approaching your landlord, it is advisable to conduct a thorough review of the lease with experienced real estate counsel to identify any termination rights, flexibility provisions, notice requirements, or leverage points that may impact your strategy. Knowing your rights under the lease gives you leverage in any negotiation.
If your lease has no exit provisions, you may still have room to negotiate. Depending on the situation, landlords may prefer a restructured deal with a paying tenant over an empty suite and a lawsuit.
Consider a Sublease
Another option to avoid paying full rent without using the entire space is to sublease part or all of the space to another business. This helps companies offset rent obligations while still paying the landlord the full rent and not breaking the lease agreement. The subleasing approach works well for tenants requiring flexibility but without termination options under their lease. Most leases require landlord consent for a sublease, so check the lease contract before asking for approval.
Taking sublease options allows renters to test the market for the space, helping them decide whether to pursue full lease termination or assignment based on demand and rate conditions.
Negotiate a Lease Termination Agreement
A lease termination agreement is a formal agreement between the tenant and the landlord that ends the lease early in exchange for a termination fee, forfeiture of the security deposit, or other consideration. This process offers a quicker break and removes ongoing liability for the office.
The termination fee is negotiable, with landlords calculating it based on factors such as the remaining lease term, current market rents, the amount of remaining unamortized transaction costs incurred by the landlord in entering into the lease (such as brokerage commissions, tenant improvement allowances and free rent) and how quickly they expect to re-lease the space. A landlord in a strong leasing market may accept a lower fee because they know they can fill the space fast. A landlord in a weak market may push for a higher fee to cover its risk. Understanding the local market conditions before starting any negotiation helps build a stronger position.
Explore a Lease Assignment
A lesser-known option is a lease assignment, which transfers the entire lease obligation to a new tenant who steps in to fill the remainder of the term. However, even in an assignment, most tenants remain liable for the rental and other obligations under the lease if the assignee defaults, unless the landlord agrees otherwise in writing.
Assignments work best when another business wants the exact space and terms for the remainder of the agreement. Landlords often prefer assignments over subleases because they simplify the tenant relationship to a single party.
Watch for These Common Penalty Traps
Several lease provisions can turn a straightforward exit into an expensive one:
- Acceleration clauses that require you to pay all remaining rent for the full term immediately upon default or early termination
- Restoration obligations that require you to return the space to its original condition, which can be costly if you made significant build-outs
- Percentage rent or operating expense true-ups that continue even after you stop occupying the space, depending on how the lease defines the end of your obligations
- Personal guarantees that hold company owners individually liable for lease obligations even after the business closes or downsizes
Reviewing these provisions before you start any exit conversation helps you avoid surprises and gives you a realistic picture of your total cost to exit.
Document Everything in Writing
To protect the renter’s rights and to avoid any future disputes concerning the rent or the cost of restoration, all agreements concerning the termination of a lease, subleasing, or assignment must be put in writing and signed by both parties. If you plan your exit strategy beforehand, renters will have more options and will be more confident when negotiating with the landlord or the leasing company about favorable terms. Putting off the planning until the last minute will reduce your negotiating power and may force the business into a less acceptable agreement. By having the correct strategy and knowing aspects of the lease, you will be able to decrease your real estate presence while keeping your costs under control.
This publication is provided by Greenspoon Marder LLP is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.
