The coronavirus pandemic has upset nearly every aspect of the way the world does business. Most non-essential businesses in the Philadelphia area have started to operate remotely since the pandemic hit. Non-essential employees have been telecommuting from home. Many retail companies have shifted to delivery only.

Depending on the severity of local COVID-19 outbreaks, some non-essential businesses have even had to shut down completely under county or township law.

What do you do when you’re tied to a commercial lease for space you can no longer use? Many businesses have had to cut costs as revenue has fallen. A high rent payment on your balance sheet now could jeopardize your company’s survival.

Business owners facing these types of drastic changes are justified in wanting out of their commercial leases. Can you get out of your lease because of the pandemic?

The answer is: possibly. Most commercial leases require that you pay a penalty fee for early termination. But landlords haven’t been immune to the effects of the pandemic. If your commercial landlord faces a high number of vacancies with a low chance of finding new tenants anytime soon, they may be more willing to negotiate better lease terms for you.

Every commercial lease is unique. The only way to know your options is to go over the actual terms of your lease – preferably with the help of an experienced local business lawyer. Holmes Business Law Firm is dedicated to getting the best terms possible for our clients. Call the Philadelphia offices of Sarah Holmes today for a consultation at 215-482-0285.

Important Terms for Terminating Your Commercial LeaseWhen reviewing your commercial lease, look carefully at any language discussing how your lease could end. Clauses to look for include:

• Lease Term – How long do you have left on your commercial lease? Your approach may differ if you have only a few months remaining versus a year or more.
  
  
• Early Termination – Your lease may actually include a clause outlining terms for early termination. If so, you must follow the procedures laid out as closely as possible. When do you need to send your notice of termination? Who do you need to send it to? Can you communicate your notice by email or does it have to be mailed to a specific address? If you don’t follow the proper method, your landlord may refuse early termination.
  
  
• Security Deposit – How much did you put on deposit? Normally, if you break your lease before it ends, you lose your security deposit. In some cases, your landlord may agree to offset the cost of your rent with your security deposit.
  
  
• Continuous Operation or Abandonment Clauses – Commercial landlords want their tenants’ businesses to stay open, especially in large shopping centers. As a result, many commercial leases require minimum hours of operation. If you’re unable to meet those hourly requirements for a certain period of time, your landlord may declare a default and take over your lease. Because of COVID-19, you may not be able to meet the minimum hourly requirements outlined in your lease. That may affect your negotiations.
  
  
• Landlord Services and Amenities – Lease agreements go both ways. Landlords have obligations just like tenants do. Your commercial landlord may be responsible for cleaning, maintenance, air conditioning, security, parking, or common areas. If your landlord is unable to provide these services during the pandemic, you could request a rent reduction or abatement. You could also negotiate lower common area maintenance (CAM) charges each month based on saved costs.
  
  
• Force Majeure Clause – Many contracts, including commercial leases, have force majeure clauses. A force majeure clause can excuse you from your lease based on major circumstances that are out of the control of either you or your landlord, such as natural disasters. For more information on how force majeure can affect your business in the time of coronavirus, check out the next blog post in this series.
  
  
• Commercial Frustration – Your lease may include a statement of purpose or the purpose may be implied. If government action in response to the coronavirus makes it impossible for you to fulfill the purpose of your contract, you could argue commercial frustration. This argument would be the most successful for businesses unable to operate at all versus those operating at partial capacity (e.g., beauty salons or gyms versus restaurants with outdoor dining options).
  
  
• Personal Rent Guarantee – Many commercial leases include a rent guarantee provision that requires the business owner to personally pay the rent if the business does not. This could make you vulnerable to personal liability.
  
  
• Landlord’s Lien – In some cases, your landlord may hold a “lien” or security interest in your physical business items located at the property. That could cover office chairs and desks, computer equipment, or even your own products stocked at your location. Your landlord could take these items as collateral if you break your lease.
  
  
• Subleasing – If you’re unable to get out of your lease, you may be able to sublease it to a subtenant. You may or may not need your landlord’s consent to sublease. Even if you’re unable to find a subtenant to pay full rent, you could offset some of the cost.
  
  
• Waivers and Amendments – Your commercial lease will normally have terms for managing waivers and amendments. Most leases require waivers and amendments to be in writing. Lease amendments often need both the landlord and tenant to sign.

Negotiating a Commercial Lease Termination with Your Landlord

Your commercial landlord may be sophisticated and experienced, with many properties and lease agreements. They may be represented by professional property management companies. When approaching your landlord about terminating your commercial lease early, you must be prepared to back up your request with financial documentation and proof of hardship.

At the same time, you have to consider that your commercial landlord may not necessarily have deep pockets. They also have bills like payroll, utilities, and taxes. Their property may get foreclosed if they fail to make their mortgage payments on time.

As a result, a commercial lease early termination can be a delicate negotiation. Even if you've had a good relationship with your landlord in the past, you don't want to ruin it now.

To get the best results for your business, you should evaluate where you stand legally and financially with an experienced business lawyer. Consider:

• Are you currently in breach of your lease?
• Are you able to continue business operations on-site in any capacity?
• Can you defer rent payments until your business starts back up?
• Can you afford to pay rent at a decreased rate?
• Does your landlord have a security interest in any of your business property?
• Would you be personally liable for rent if your business doesn’t pay?
• Do you or your landlord have insurance that covers business interruptions?
• Are there any government relief or aid programs available to you?
• What is your business plan moving forward?
• Considering your situation, is lease termination the best option?​​

At Holmes Business Law, we help you set your financial goals before going into the negotiation with your landlord. We provide creative solutions for you to navigate the shifting COVID-19 landscape based on the needs of your business now and in the long-term.

Call our Philadelphia area law offices now at 215-482-0285 for a consultation with an experienced lawyer dedicated to helping your business thrive.

Leasing commercial space for your business is quite possibly just as important as day to day operations.  When looking for a place to operate your business, there is much more to consider than the monthly rent.  Just because a monthly lease payment is affordable, does not, in and of itself, mean that it is the right deal for your particular business.
 
If you have ever entered into any kind of legal contract, you know that they can be very lengthy and full of legalese.  The reason being is that the landlord’s Attorney is making sure that all bases are covered.  If you are not savvy to the meaning of all of this legal jargon, you may find yourself battling with “lease remorse,” after it is too late.
 
There are many considerations that should be carefully weighed, before putting your John Hancock on the dotted line. Below, I will discuss 5 items that require careful deliberation before signing a commercial lease.


1.  Before looking at commercial space, do your homework.  Check out the neighborhood to determine if it is a good fit for the product or service you are offering.  For example, you probably don’t want to open a sub shop in a location where there will be sub shops on either side, just because the rent is cheap. You know what they say in the real estate industry, “Location, Location, Location!”  You want to get the biggest bang for your hard-earned buck and you don’t want to throw your money away.

 
2.  Speaking of money, have a well thought out budget.  Know what you can afford and don’t look at places that are out of your price range.  Anything over and above what you can afford to spend will cut into your profit margin.  Inquire up front how much the rent is and when it is payable.  Does the landlord require monthly or quarterly payments?  What is the term of the lease?  What happens if you have a change of circumstances before the term of the lease expires?  Ask about a “break clause.”
 
3.  Rent is most likely going to be one of your highest overhead costs.  Be sure you understand what if any other additional fees are required, over and above the actual rent.   Unexpected fees can wreak havoc on your bottom line.  CAM (Common Area Maintenance) charges are very commonly passed on to tenants in some commercial leasing contracts.  VAT (Value Added Tax) rates can also add an extra percentage to lease payments on commercial properties including offices, hotels, retail stores etc.  Mixed use properties also have the potential for these fees. 
 

4.  By signing a commercial lease that provides for the landlord to have the ability to enter a Confession of Judgement against you, you run the risk of being compromised legally.  A confession of judgement is a term that allows the landlord to enter a judgment against you, in a conflict situation, without you having your day in Court.  Many states prohibit these types of clauses and/or language; however, the Commonwealth of Pennsylvania does permit this scenario so be on the lookout. 

 A typical confession of judgement (also called a cognovit note) looks something like this:
 
“The undersigned irrevocably authorizes any attorney to appear in any Court of competent jurisdiction and confess a judgement without process in favor of the creditor for such amount as may then appear unpaid hereon, and to consent to immediate execution upon such judgement.”


5.  Know the difference between a net lease and a gross lease.  The terms of a net lease require the tenant to be responsible for regular operating costs.  Operating costs can include things like property taxes, property insurance, utilities, trash collection, maintenance and repairs, etc.  Often landlords will pass a portion of these expenses on to the tenant.  With a gross lease, the landlord assumes responsibility for these expenses. 


Make sure you have read and understand the entirety of the lease.  If you are not confident in your ability to do so, have an attorney review it for you.  Once you have signed the lease, you are legally bound to the terms and conditions. 


Ask yourself, all things carefully considered, if you are being realistic and if you have made the best possible deal that suits every aspect of your business.  If not, revisit the terms.  Contracts are always open to negotiation prior to signing.  Just because you are handed a “standard” lease, don’t feel pressured to sign it.  Above all, don’t be afraid to walk away if you have any unresolved reservations.

If you need help with a commercial lease, set up a time to talk to someone on our team here. 
 
 

One area where many small business owners skimp on legal advice is with their commercial lease.  If you're not careful and do not have a lawyer review your lease, you could be in for years of problems.

Most commercial leases are for a long term, typically three, five, ten years or more.  One area to keep an eye on in your lease is the amount of rent.  Sounds easy, right?  You find a nice space that advertises itself for $1,000 per month.  You get excited, run your numbers and decide your business can afford to pay $1,000 a month in rent.  Not so fast.  Look closely at the area that discusses the rent charges.  Typically a lease will specify the amount of base rent to be paid and then there will be additional paragraphs that address additional rent.  What is included in additional rent?  A large number of things, depending on your landlord.  Use and occupancy tax could be added, utilities, past due charges, many items might be specified, make sure you understand how much will really be added to the lease each month.  If you aren't comfortable with the arrangement, negotiate! 

Another area to closely watch is for any rent escalation clauses.  As I pointed out above, a commercial lease is usually for a long period of time, several years or more.  Do you think your landlord is okay with you paying the same amount of rent for five years or more?  Think again.  There is likely a rent escalation clause in the lease specifies what the base rent will be in years two, three, four and five.  Make sure the exact amount is noted, along with the exact dates of when the new base rent rate applies. 

I am an attorney that reviews commercial leases for a very reasonable rate.  It's money well spent to make sure you are not placed in a bad position today or several years down the line when you are locked into an unfavorable lease.  Drop me a line today about reviewing your commercial lease.