Downsizing Guide for Businesses
(Note: The following information should not be considered absolute or binding in any way and does not imply a consultant relationship of any kind. The terms and conditions of individual commercial leases vary considerably and the information on this page should not be taken as legal advice.)In this guide:
- How to approach your landlord
- Important information on subleasing
- Common, costly mistakes
- The role of tenant reps
During economic downturns, many businesses look to cut costs because they find they have more space than they need. This is often a result of lay-offs, relocating/outsourcing, slower than expected growth or in some cases the need to close.
Options for dealing with excess space include ending the lease early, subleasing, assigning or negotiating a buyout of the lease. Some commercial leases include the option to completely move out but you should always check the terms of your lease before deciding to take any action.
In addition if your business plans to sublet space, check with your landlord to make sure it is allowed and be careful when finding business to sublet your space. Your company will still be liable for paying rent until the end of the lease and subletting space to a company that is susceptible to economic downturns can ultimately make matters worse.
The next section details the five essential steps every business needs to take when looking to downsize.Step One: Examine Your Lease
Examine your lease and look for specific terms regarding early termination. If you wish to exit your lease but the circumstances for ending the agreement don't qualify under those which would allow you to exit without penalty, your business will likely incur financial penalties which may include legal fees, sublease / assignment expenses and even payment of all or a percentage of remaining rent.Step Two: Talk With Your Landlord
Talk with your landlord about your lease in an informal polite conversation. The landlord may have another party interested in your space and may be receptive towards letting your business simply ending the agreement.
Your company will have better odds of getting out of a lease if your company has a shorter amount of time left on the lease. In addition your chances can improve if the building is full because this usually means your landlord will be able to quickly find a tenant and maybe increase rent depending on the specifics of the property.
When speaking with your landlord be careful not to sound desperate or tell them critical business information (ie going out of business). They may use it to charge a premium to exit the lease. It is best to hire a local tenant advisor who can make your case for you without you being personally involved.
If your company finds another tenant, especially an established business willing to take over the entire lease, you will have an even stronger case. Keep in mind the landlord will want to review their financial information, thus recommending an unsuitable tenant is not in your best interest.Step Three: Offer a Buyout
If your landlord does not want to terminate the lease voluntarily, offer a buyout as a financial incentive. Often a business will "cover" a landlord during the time it takes them to find another tenant for the space. Caution: If the new tenant pays a lower rate, you may be liable to cover the difference for the remainder of your original lease.Step Four: Consult with a Tenant Advisor
If your landlord refuses to end the lease, consult with a tenant advisor or an attorney that specializes in real estate to make sure that if you decide to break the lease, your company and landlord stay within the limits of the law.Step Five: Sublease / Assign Space
Consult with a tenant representative to find prospective tenants to sublease or take-over your lease. Your landlord may assist in this process as well but it depends on individual circumstances. Even if you have vacated the space, you might have to pay rent until a new tenant can be found.Notes on Subleasing / Assigning Space:
Terms of any termination, buyout or sublease of commercial space will often require the approval of your landlord. If your company wants to sublease space, your business will not be granted rights outside of those extended in the original (master) lease. Your company cannot add, partition or subtract space or modify the length of the lease without the landlord's permission.
If you are assigning the lease to another company, they will become directly liable to the landlord but your business may be required to guarantee payments of the new tenant depending on the agreement. We recommend you contact a local tenant rep for advice on assigning space.Final Thoughts
Depending on the situation and market conditions, it may be to your advantage to terminate your lease but we advise that you contact a professional before making any decisions. It is unlikely that you will get out of your lease without some penalty. You may be liable for remaining rent, attorney's fees and meeting expenses such as improvements and broker commissions.
Keep these things in mind when negotiating your next lease. Have your broker negotiate a break clause at various points in the lease that allows you to end the lease early should you need to move.
Contracts are binding by law and some businesses may be unable to end their lease depending on the landlord and contract obligations.