Defaulting on a Commercial Lease

Today’s economy is tough, and many businesses are failing; leaving them with a commercial lease they cannot fulfill.  Very often, business owners get better deals on rent by signing a long term lease, but that means trouble when you go out of business before the lease runs out. In most cases, however, you do have some options regarding that commercial lease.

Communicate with the Leaseholder

If you see your business failing; talk to your leaseholder. In many cases, you can buy the lease out for a fraction of what it would cost to fulfill it. A buyout option may be listed on your lease agreement. If not, discuss one with your leaseholder. They’ll be much more likely to work with you before you’re behind on your rent.

Consider Subletting

Another option you may have as a tenant is the right to sublet the property. Subletting means that you rent out the property to yet another tenant. They pay you and you pay the landlord. This arrangement is good for both you and the landlord because no money is lost, and you’re not required to default. Check your lease to see if subletting is allowed.

Evaluate Your Options

If your commercial leaseholder won’t work with you on a buyout, or if you can’t afford the buyout amount and cannot sublet, then you may be looking at defaulting on the lease. At this point, it’s wise to begin working with an attorney, as you close out all of your business accounts and commitments.

How you’ll handle your lease default, along with other contracts and financial obligations are mostly determined by how the business was set up. If your business is a sole proprietorship, you can be held personally liable for the debts incurred by the business, including fulfilling the lease.

In most cases, however, businesses will be set up as corporations or some other separate entity from the owner. In this case, you as the owner cannot be held financially responsible for the debts of your business. The business can, however, be forced to sell assets to pay off debts, and this would include the lease.

Getting Legal Help

As with any real estate transaction, it’s a good idea to consult an attorney to act in your best interests. Through an attorney, you can likely negotiate an end to a commercial lease that will be financially suitable for both you and the owner of the property.