Commercial Lease Business Failure

Commercial Real Estate

NOV 28, 2023

Signing a commercial lease is a significant commitment for both landlords and tenants. However, in the unpredictable world of business, there may come a time when a tenant is forced to close shop. In this blog post, we'll explore the key aspects of what happens in a commercial lease when a tenant goes out of business, shedding light on the rights and responsibilities of both parties.

Notification of Closure

The first step is for the tenant to notify the landlord of the situation. This communication is crucial, as it sets the wheels in motion for the next steps in the process.

Review of Lease Agreement

Both parties should thoroughly review the lease agreement to understand the provisions related to early termination or default. This step is essential to avoid any misunderstandings and to ensure compliance with the terms outlined in the contract.

Early Termination Clause

Some leases may include an early termination clause that outlines the process and conditions for ending the lease before the agreed-upon term. This clause often specifies any penalties or fees associated with early termination.

Mitigation of Damages

Commercial leases often include a provision for mitigating damages in case of tenant default. This means that the landlord is obligated to make reasonable efforts to re-rent the space to a new tenant. The former tenant may still be responsible for rent until a new tenant is secured.

Subleasing or Assigning the Lease

In some cases, the tenant may have the option to sublease the space to another business or assign the lease to a new tenant. However, this is typically subject to the landlord's approval and may be outlined in the lease agreement.

Security Deposit and Unpaid Rent

The security deposit held by the landlord can often be used to cover unpaid rent or damages incurred during the tenancy. Any remaining balance is usually returned to the tenant.

Personal Guarantees

If the lease was personally guaranteed by the tenant or another party, they may be held responsible for any outstanding obligations even if the business goes out of business.

Negotiation with Landlord

Depending on the circumstances, the tenant may be able to negotiate with the landlord for a resolution that benefits both parties. This could involve a buyout, a reduced rental rate until a new tenant is found, or other mutually agreeable terms.

Legal Recourse

If a resolution cannot be reached through negotiation, legal action may be pursued. This could include mediation, arbitration, or potentially a court proceeding.

Navigating a commercial lease when a tenant goes out of business requires open communication, a clear understanding of the lease agreement, and a willingness to work together towards a resolution. Both parties should approach the situation with transparency and a desire to find a mutually beneficial outcome. Consulting legal and real estate professionals with experience in commercial leases can provide invaluable guidance during this process.

Disclaimer: This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.


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