The Exit Clause of a Commercial Lease
Today's commercial lease often contains financial contingency clauses to offset unexpected economic downturns. Current apprehensive financing for commercial properties coupled with the vagaries of a shaky economy make parties more wary about entering into a contract. To offset this wariness, lease negotiations may include an exit clause to ensure that parties aren't saddled with obligations that have become economically unfeasible.
What an Exit Clause Should Contain
An exit clause allows either party to walk away from an untenable commercial lease. In negotiating terms for the exit clause, the following should be considered:
- Notice. Parties should not be taken by surprise when someone decides to "walk away." As in a residential lease, the other party needs to be notified timely. Negotiate the time requirement of the notice. The common time for notification is usually 30 days.
- Responsibilities. Each party should determine what their respective responsibilities will be in case of a contract termination.
- Deadlines for any actions should be included. For example, if the exiting party is a retailer, he or she should provide the length of time it will take to vacate the store and formally cease operations. If the exiting party is the lessor, he or she should also provide a time when the property has to be vacated. Additionally, an exit clause should consider what occurs when a deadline is missed.
- Possible costs. Even if the exit is not legally a "default," there may be accompanying costs that arise from the cease of operations, decreased profits, vacating and moving. Who will assume what percentage of walk away costs should also be negotiated.
If the Contract Does Not Have an Exit Clause
If the contract does not provide an exit or termination clause, the party who wishes to terminate can do the following:
- Talk to the other party. An informal discussion may offer an opportunity to introduce the subject of exiting the contract. If the reasons are legitimate and the other party is not duly burdened by the exit, he or she may agree to terminate the lease.
- Buy out the lease - A financial incentive may encourage an unwilling party to allow the other party to voluntarily exit the lease agreement.
- Seek legal counsel to determine other legal recourses and possible penalties in walking away from a commercial lease
Find an Attorney
Negotiating a commercial lease can be complicated. Contingencies have to be worked out including any exit clauses. To ensure that the contract is fair to both parties, an attorney should be consulted. Find an attorney experienced with commercial leases to draft or review any agreement to make sure the provisions are compliant with state law and that your rights are represented within the contract.