This is a transcript of an episode of the LeaseSmart Podcast.
Craig: This week, I wanted to speak about something that could be considered controversial. When we’re done here you’ll see that it’s not. I don’t know what to title it exactly. At first, I called it breaking a lease, but that’s not really exactly what we’re talking about. Maybe we’re talking about winding down a lease, but the point is sometimes your business model just doesn’t work out and you just can’t fulfill this agreement that you made with the landlord. I’ve given talks about this before and landlords first get upset from me even addressing the issue, but then at the end of the talk they realize, “Wait, this is great information. I’m glad you’re saying that.”
My point is this, a lease is meant to be a binding document where the landlord agrees to certain things and the tenant agrees to certain things. You’re supposed to keep fulfilling your obligation to that lease. Fine. No argument there.
But what happens when the business model fails and you don’t have the money for rent? This happens all the time. What does the tenant do? Many times the tenant is embarrassed, mortified, etc. and they don’t know what to do. They’ll just leave in the middle of the night. They’ll pull all of their stuff out of there, mail their keys back to the landlord and say “Hey, I’m sorry. Do what you have to do.” Well that’s the last thing you want to do. I actually had a call from the owner of a shopping center one time who was saying, “ Craig, if they had called me and let me know they were having problems I would have let them stay in the space free until we found a new tenant.” An empty space, especially in a retail center, makes the retail center look bad. That’s not that unusual and so my advice when you need to break a lease is that the first thing you need to do is call the landlord and say ,“Hey, I’m sorry. I know I owe the money. We’re not arguing about that. What I’m saying is I don’t have the money. We both have a problem. I’m more unhappy about this than you are but the point is I don’t have the money. What do you want to do about it?”
By talking to the landlord, now you may have some options. They might temporarily reduce your rent hoping that your business will turn around. They might have another tenant that would take the space and it’s not such a big deal for them to let you out of the lease, and maybe your rent is even below the market. There are so many options, but communicating with the landlord should be the first thing you do.
Now, you do want to talk to an attorney too, and see what your position is. You want to look at the lease and see if you have personally guaranteed it or if it is a corporate guarantee only. If you fail, I guess the corporation’s going to fail, too. You can file bankruptcy and escape the obligation somewhat easily. If you’ve personally guaranteed the lease, then that is a different story. If you have a lot of assets you just might have to keep paying your payments no matter what since those assets will end up being part of the negotiation with the landlord. Or, if you‘re willing to actually go bankrupt, or threaten to go bankrupt, that you won’t have any choice unless we work something out, those are all things that we need to talk about and you can talk to a real estate attorney in your state who can tell you what your rights and obligations are in that state.
Either way, there are things that we could do. The first thing is to talk to the landlord and see if you can work something out. It’s a problem for them and they want to try and work it out, too. You just never know what they can do until you talk to them about that.
N: Yeah that makes a lot of sense. As I mentioned, I worked with residential leasing before and we would encourage our tenants to do the exact same thing. If we could help them find someone else to come in right after them, then we could let them out of their lease.
C: That’s very true and in commercial, particularly in Florida, which is where I’ve done a lot of work and I checked this with the attorney, my understanding is that if you vacate a space, the landlord is obligated to do his or her best to fill the space. When the space gets filled, they need to credit you with that new rent for that time period. So your obligation might be less than you think if they’re able to re-rent the space quickly. That’s part of the discussion you have with the landlord. What we’ve done in the past is go to the landlord and say “Hey! The space isn’t working. We need to get out of here now.” Sometimes this might be the tenant who is healthy financially but they just don’t want the space anymore for a multitude of reasons. So, we can say, “Look, here’s our obligation to you. How about we pay you X dollars upfront right now.” If there are 3 years left on the lease we’ll say, “We’ll pay you 9 months’ of rent upfront. Would you like cash or check? We have to go. And, Mr. Landlord, think about this – if you’re able to lease your space to someone new in 3-6 months, you just made a bonus. This could be a good thing for you.”
It’s all in negotiation. I’ve got a 5 page report that I put together that I sent to these companies that will call and say, “What do I do?” Frankly, I get so many calls about this. People are distraught and don’t know what to do. They give a list of negotiable items that they can talk about with the landlord, with the attorney. There are lots of things. It would be a very long podcast if I went through them all. But the point would be, if you can’t fulfill your obligations, the first thing is to call your landlord. I guess it may sound slightly self-serving, but let me also mention that sometimes you’re so distraught at the situation that you’re not thinking straight, and maybe you should call your real estate broker and let him talk with your landlord. Maybe he can help you sublease the space. He might be able to help you assign your lease to a new user. Maybe you can find one of your competitors who would want your business, and the space, or just the business. And maybe there may be some money involved that would help keep the landlord happy. So, there’s lots of brainstorming and calm thinking and communicating to do. If your mind is just all foggy because of this major stress you’re under, you might want to get some help from a negotiator at some point. This person could be your attorney, too.
Then finally, if your business is failing, you can tell in advance that you’re making less than you’re spending. You don’t need to wait to the very, very end, before you spent your last dollar, and then talk to the landlord. If you can see the future and it’s not rosy, that’s when I would start talking to the landlord, so you actually have some money to help cure some problems with.
Also, if the landlord has been getting your money in full, on time every month and then you, all of the sudden, tell him you’re out of money. They’re not going to quite believe it. They’re going to assume you’ll come up with the money from friends, family, equity loans on your house, etc. They can put their head in the sand and just wait for your check to arrive; somehow you’ll come up with the money and I imagine that happens a lot of times. So if things aren’t going well, and you could check with your attorney on this, it seems to me you might want to start making some of your rent payments late or making partial payments so they understand the seriousness of your situation and that they do have a problem headed their way and that together we’re going to solve it the best way we can.
Again, it’s nothing personal. The business is failing. I can assure you the landlord has had this happen before and it will happen again. Just read the newspapers about some real prestigious companies that have had problems in addition to the small mom and pop companies. It’s just part of business life and as with most everything, accurate and calm communication would be the first thing that you’d want to do.
N: Okay! Well that’s really good advice. Thank you.