By Jeff Grandfield and Dale Willerton
While it’s not that common of a scenario, a physician tenant may consider terminating his/her commercial lease. As we explain in our book, Negotiating Commercial Leases & Renewals FOR DUMMIES, there are various reasons why you would want or need to do so. Terminating your lease can impact a landlord (as empty commercial units do not generate any income for a landlord). Therefore, negotiating that initial lease should come quite easily. Should you need to terminate your lease, however, things may not be quite as smooth.
As The Lease Coach, we have been coaching and consulting with commercial tenants (including many physicians) since 1993. Over the years, tenants have frequently asked us how to “break a lease”. Should the tenant continue to lose money? No. You have numerous options available that may or may not help you to terminate – perhaps with limited personal loss and damage. In no particular order, our professional recommendations are as follows:
- Understand the language. In reading this so far, you will have likely noticed we have spoken of “terminating a lease” rather than “breaking a lease”. In the real estate industry, the term “terminating a lease” is preferred over “breaking a lease”. In the latter case, this suggests that you are doing something which is both legally and ethically wrong. A tenant’s words, in fact, can set the tone for success or failure.
- Talk to your landlord. The Lease Coach has been very successful in persuading the commercial landlord to take back the commercial space when the present tenant is struggling. The landlord can then re-lease the space. It is, in fact, to the landlord’s advantage to precipitate a vacancy by working in advance to find a replacement tenant. This allows the landlord to maintain cash flow. Instead of a conspicuous “Going Out of Business Sale” sign in a tenant’s window or a “For Lease” notice on the outside of the property, the public will see signage welcoming a new tenant into the property. A “Coming Soon!” or a “Grand Opening” sign is far more attractive.
- Find a replacement tenant. Commercial landlords are more likely to be cooperative terminating your lease if a replacement tenant can be found for your space. The existing tenant will surrender his/her Lease Agreement and location back to the landlord. Commercial tenants signing a Surrender Agreement can vacate the premises immediately or keep occupying the space until a new tenant is found. A new Formal Lease is drafted for the new tenant. The new tenant signs his/her new Lease Agreement and begins paying the rent.
- Assign your Lease Agreement. Essentially, this means finding another prospective tenant to agree to take over your practice space and current lease terms. If the person taking an assignment of your lease agreement is also a physician who has also purchased your practice this is more acceptable to the landlord than if the Permitted Use is completely changing to a different industry. In this case, a secondary or replacement Formal Lease is not required; usually, a two or three-page Lease Assignment, prepared by the landlord, will be all the documentation required to get the job done.
- Consider other vacant space within the same rental property. Is there something more appropriate for your needs? Are you faced with excessive space? Can you reduce the size of your waiting room or remove an extra examination room? With commercial rents being charged by the square foot, physician tenants downsizing typically will find the rent more affordable. A commercial landlord can be willing to free you from one leasing obligation should you remain in his/her property. Downsizing is a common solution for a doctor who may be struggling paying too much rent. The problem, frequently, is that the physician is not paying too much in rent but he/she has leased too much square footage.
On a related note, if you are approaching your lease renewal due date and are uncertain about your future, it can be possible to include your own early termination clause. One older medical doctor we worked with needed a lease renewal but also wanted to add the right to close his practice if his health took a turn for the worse or he chose to retire. When we explained to the landlord that an early termination right was not for the doctor to move to a competitor’s property but to actually close the practice, the landlord agreed.
Overall, physician tenants should carefully consider their own situations prior to attempting to terminate a lease. Taking initial precautions prior to signing a lease are often best (such as having a Lease Consultant review the document for your own protection). If you have never gone through this before, it is reasonable to expect that you will need some help.
For a complimentary copy of our CD, Leasing Do’s & Don’ts for Commercial Tenants, please e-mail [email protected].
Dale Willerton and Jeff Grandfield – The Lease Coach are Commercial Lease Consultants who ; while work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail [email protected] or visit www.TheLeaseCoach.com.