Consequences of Breaking an Office Lease Agreement

What could happen to a business and its owner(s) if they break an office lease agreement? The answer depends on the business structure, how the owner(s) signed the lease, and whether the owner(s) personally guaranteed any obligations.

Penalties for Breaking a Lease in General

A lease is a contract. If a party breaks a contract, it can be sued for contractual damages, which are what the party would have had to pay under the contract. So, for example, say that a business signed a three-year office lease for $2,500.00 per month, and that 18 months into the term, it breaks the lease. At that point, the business' remaining obligation is for 18 months at $2,500 per month, or $45,000. The landlord could sue for that amount.

The landlord does have an obligation to try and re-rent the premises; once it does, it generally can no longer recover damages from the renter who broke the lease. That means that if the landlord succeeds in finding a replacement tenant in 6 months, the landlord could only recover 6 months rent in our previous example. However, there is no guarantee--especially in today's commercial real estate market!--that the landlord will succeed in finding a replacement tenant.

The landlord may take overdue or unpaid rent out of the security deposit, then sue for any balance remaining.

Critical Issue: The Type of Business Structure

Corporations (Inc.) and limited liability companies (LLC) are their own legal entities. If a corporation or LLC took out a lease on office space, only the company is liable for the rent, except as otherwise indicated below. That means that while the company could be sued, the owner(s) cannot be. However, partnerships and sole proprietorships ARE their owners--there is no separate legal entity. If a partnership or sole proprietorship rents office space, the owner(s) are liable in the event of breaking the lease.

When Owners are  Liable for Corporations and LLCs

In order  to gain the protection of the corporation or LLC, it's critical that any owner(s) who signed the lease did so as officers of the company, on the company's behalf, and not in their individual capacity. It's therefore important to make sure that there is no confusion or ambiguity about how or who signed the lease.

Also, a landlord will sometimes require the owner(s) of a corporation or LLC to personally guarantee the lease obligations--including rent. If the owners did, they can be held liable on those guarantees.

How an Attorney Can Help

A lawyer can set up the right business structure for  you, and also review and negotiate your office lease so that it is as advantageous as possible for you.

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