If you, as a tenant, break your NYC commercial lease, the likely answer is that you will owe your landlord money. Most certainly, you will receive at least one letter from your landlord’s attorney, and, most likely, in that letter, you will be threatened with litigation. However, litigation may or may not happen. Some sort of settlement is generally what happens if an NYC commercial lease is broken. A well-drafted lease termination clause can be crucial in this situation.
What happens more specifically will depend almost entirely on what is stated in your lease. For example, before the NYC commercial lease was signed, you may have negotiated lease termination provisions that allow you, as the tenant, to lawfully break the lease. As a couple of examples, you might have negotiated what is often called a “bailout clause,” allowing you to terminate the lease if your sales do not reach a certain level. Another example is something like an anchor-tenancy or occupancy-level clause, which allows smaller retail outlets to terminate their leases if a major anchor tenant leaves a mall or shopping area or if total occupancy of the mall/area falls below an optimal level.
Generally, even if a termination clause is negotiated, the landlord negotiates various tenant payment obligations to ensure that the landlord recovers its up-front costs and some revenue. Examples include payment by the tenant of broker’s fees, costs for the original build-out, etc., and also, maybe, three to six months of rent obligations post-termination of the lease. Thus, even with a termination clause in the lease, the practical result of breaking your lease is to owe the landlord some money.
What if There is No Lease Termination Clause?
What happens without an early termination clause will still depend on what the lease says. But now additional questions are also important such as “why” the lease is being broken and “when” in the lease term. If a lease is broken only a few months before its normal lease termination, it will cause fewer legal issues than if it is broken six months after it started.
The “why” matters for many reasons. If the tenant goes bankrupt and out of business for lack of sales and cash, then what happens has a different set of answers. These answers depend on the Bankruptcy Code; presumably, the tenant may have no funds to pay the landlord for current or future lease obligations.
If the “why” is that the landlord is in breach of some material term of the lease, this will also significantly impact what happens after the lease is broken. Yes, the landlord will demand compensation. But, the landlord’s alleged breach may be a legal defense. It may also impact a negotiated settlement or the results of NYC lease litigation (if such is filed by the landlord).
If the “why” is because your business operations need more space (or less space), this can lead to many possible negotiated settlements, including a renegotiated lease, obtaining potential alternative tenants or subtenants, etc.
Ultimately, the wisest course of action is to START by consulting with an experienced NYC commercial lease attorney and THEN begin negotiations BEFORE breaking your NYC commercial lease. You may be surprised by what can be negotiated regarding lease termination options.
Contact the NYC Commercial Lease Negotiators at Wright Law Firm NYC Today
For more information, call the experienced New York commercial lease and real estate attorneys at Wright Law Firm NYC. We provide top-tier commercial real estate legal services for the NYC business community. To schedule a consultation, contact our office by e-mail or call us at (212) 619-1500.