Before my schedule bogged down in tinsel and year-end deadlines, I posted on a question that's been almost common: "I signed this lease before the economy tanked. How can I get out of it?" Typically, the business has contracted to a degree that it no longer needs, or simply can't afford, all (or any) of the leased space.
While there are no magic bullets, there are four ways to eliminate or reduce the burden of a lease on a business. The first option, explained in Part 1 of this post, is buying out the lease. Let's now consider options two through four.
Assignments and Subleases
Oversimplified and misunderstood, subleases and assignments have someone else take responsibility for some or all of your space. They can be useful, but be clear about the differences between the two approaches. Also understand the requirements your lease imposes on your ability to use them. Typical leases give the landlord rights to approve your deal (with you paying for the landlord's costs in doing so).
Also know that in today's market, with rents down and vacancies up in many places, the chances of finding a subtenant or assignee (who will expect to pay less rent to you than they would to the landlord) to get you completely off the financial hook, are low. You may have to settle for a deal that leaves you responsible for some part of the rent obligation.
In an assignment, the new tenant takes over your lease with the landlord, but that might not take you out of the equation. An assignment does not automatically release the original tenant or personal guarantor from liability. If the new tenant doesn't pay the rent or otherwise defaults, the landlord will come looking for you. Therefore, you may not have improved your situation at all, and may have made it worse. If an assignment doesn't include a full release from liability, you may be better off subleasing.
In a sublease, you become the landlord, or in legalese, a sub-landlord (if your lease IS a sublease, a sub-sub-landlord, and so on). Your liability to your landlord is not changed by a sublease, but you have a better chance to protect yourself than in badly handled assignment. Since your sub-tenant is paying the rent to you, you'll know when rent is being paid (or not), and you'll have the legal right to pursue the sub-tenant for the unpaid sums. On the other hand, a sublease can be trickier than an assignment in that you need to make sure the critical provision of your lease and the sublease match up.
Maybe the landlord will agree to take some or all your space back. Maybe the Mayans are right and the world will end on December 21, 2012 this year, so why worry about your lease? But seriously, a take-back may not be likely, but it is worth thinking through. If your business has a below-market rent, yet it is still struggling in this economy, your landlord may see the benefit in taking space back. If market rents are down, it may be necessary to sweeten the deal with an agreement to cover some or all of the spread between your rent and the new tenant's deal.
Extend the Lease
It sounds counter-intuitive, but extending the term (lengthening the lease) might solve your current problems with the lease. There is no free lunch (or magic bullet); you will pay more over the long run with this approach. The landlord agrees to reduce your rent in the short term if you agree to a longer term with higher rents in the future. Thus, you and the landlord are betting that business will get better and your company will be able to handle that increased burden. If you have personally guaranteed your lease, kicking the can down the road could be a terrible decision. Either be sure the Mayans are correct about 12/21/12, or carefully work through the idea with your attorney, before agreeing to a deal like this.
Remember, a premature exit from a lease is best negotiated before you sign it, and the best way out of a bad lease, or any bad contract, is not signing it. Your business lawyer can help you think through the issues.