How to Get Out of a Retail Lease: Your 3 Options
Updated: 6 days ago
What Happens When a Retail Location Doesn’t Perform?
I have been a commercial real estate agent specializing in retail leasing, representing landlords and tenants, for six years. One of the first questions I hear when showing a space to a new tenant is:
“What happens if the location doesn’t work?”
It’s a good question, and one tenants should ask before signing a lease. It is much better to understand your options before committing to a long-term lease than a year in when you’re trying to figure out how to get out.
Sometimes the concern is that the location will not perform. Sales may not meet expectations, the trade area may change, or the business may discover that the location simply isn’t a good fit. Other times, the concern comes from the opposite problem:
The business performs so well that it outgrows the space.
In either situation, the tenant can eventually find itself asking:
“How do we get out of our current lease?”
You want to understand this early because there isn’t a one-size-fits-all answer, and you rarely, if ever, get out for free or come out ahead.
There are several potential solutions, including a sublease, assignment, or negotiated termination, but each comes with different costs and complications.
A Retail Lease Is a Long-Term Commitment
One of the easiest mistakes a new tenant can make is focusing on the present rather than what the business may look like several years down the road.
Retail leases commonly range from 3 to 10 years, and landlords and tenants want different things when signing a new lease. A landlord wants a 10-year lease with a personal guarantee; a tenant wants a 1-year lease with nine renewal options and no guarantee or risk. Just as you negotiate the lease rate and other terms, you have to find a term that works for both sides.
Over that time, factors outside the tenant’s control can affect the business: rent can increase, triple-net (NNN) expenses can rise, sales can slow, competition can change, or the business can outgrow the space it originally selected.
That is why tenants should consider not only whether they like a space today, but how the location and lease will fit the business if things go better—or worse—than expected.
Your Options for Getting Out of a Retail Lease
If you need to get out of a lease, the first step is understanding what your lease says about subleasing, assignment, and early termination, and then determining which options are realistically available. The three most common paths are below.
Option 1: Sublease the Space
A sublease allows the existing tenant to bring another business into the space while the original tenant generally remains responsible for the existing lease. The specific requirements for a sublease will depend on the lease and typically involve landlord approval.
This can work well when the existing lease has favorable terms compared with the current market and the space can be taken over with minimal changes. In some cases, the existing tenant may even be able to sublease the space for more than they are currently paying if market rents have increased.
However, finding a replacement tenant isn’t as simple as putting a “For Lease” sign in the window. The market may have changed, the existing rent may now be above market, or the space may require improvements to attract another user. The incoming tenant may request lower rent, free rent, a tenant improvement allowance, or other concessions. If the current tenant hires a real estate agent, a brokerage commission will also be due.
Even after finding a replacement, the original tenant may still have obligations under the lease if the new tenant defaults.
Option 2: Assign the Lease
An assignment is different from a sublease. An assignment generally transfers the existing tenant’s interest in the lease to another party and, subject to the lease, typically requires the landlord’s approval.
This can be particularly beneficial when a business is sold, and the buyer wants to take over the existing location. The landlord may evaluate the incoming tenant’s financial strength, experience, proposed use, and other qualifications before approving the assignment.
An assignment doesn’t guarantee that the original tenant is completely released from every obligation, either.
I recently handled a situation where the existing tenant remained a guarantor for one year after an assignment. If the new tenant did not default during that year, the original tenant would be released. If the new tenant defaulted, the original guarantor would remain responsible for the remainder of the lease term.
Both your existing lease language and what you negotiate with the landlord at the time of the exit or assignment matter.
Option 3: Negotiate an Early Lease Termination
Another option is negotiating a termination fee with the landlord.
This is often what tenants mean when they ask:
“Can I just give the space back?”
Sometimes a landlord may be willing to negotiate, particularly if the existing rent is below market or the landlord has a quick path to backfill the space with someone better.
But the landlord doesn’t have to agree to a termination. Most landlords do not want to and will not agree to give a tenant the unilateral right to walk away from a lease.
If the tenant leaves, the landlord will likely have to pay a new leasing commission, provide tenant improvements, offer free rent, cover operating expenses during the vacancy, and more while looking for another tenant.
Because those costs are uncertain, a termination fee can often be the most expensive route for the tenant. The landlord accounts for the worst-case scenario because they don’t know in advance how long the space will be vacant, what lease rate they can achieve, or how much they will have to spend on improvements, free rent, landlord work, and leasing fees.
The landlord isn’t simply considering how much rent remains on the lease. They are considering the cost and risk of replacing the tenant.
A Real-World Example: What a Lease Termination Really Cost
I recently worked with a landlord where a national tenant wanted to terminate its lease early. The tenant ultimately paid the landlord a few hundred thousand dollars to get out.
Receiving a large termination payment was certainly a win for the landlord. More important, though, is what happened next, and why the tenant came out on the wrong end of the deal.
After the landlord received their large fee, I marketed the space for them. Shortly after, we secured another national tenant at a higher lease rate and for a longer lease term. The tenant improvement allowance and free rent provided to the new tenant were nearly half of the termination payment received from the previous tenant.
The landlord not only secured a strong new deal, but also made money. The total deal costs were less than what the previous tenant paid to terminate, letting them pocket the rest. The tenant asked for a way out and took it without understanding all the options beforehand.
Why Tenant and Landlord Representation Matters
Whether you are the tenant trying to leave a location or the landlord deciding how to handle an early termination, having the right commercial real estate agent involved can make a significant difference.
The tenant and landlord may both want to minimize the costs in this situation, but their interests are not necessarily aligned.
The tenant wants to minimize the cost of getting out and move on as quickly as possible.
The landlord wants to protect the income and security the existing lease gives while avoiding the additional costs of finding a new tenant.
An experienced retail agent can evaluate the market, identify potential replacement tenants, estimate likely rental rates and concessions, and compare the economics of the available options.
Most importantly, the agent should look out for the interests of the party they represent and pursue the solution that best fits their needs.
Think About the Exit Before You Need One
The best time to ask “What happens if this location doesn’t work?” is before signing the lease.
For tenants, that means understanding the lease, evaluating the location carefully, and considering how the business may change over the term.
For landlords, it means thoroughly evaluating the tenant, understanding the financial strength behind the lease, and considering the potential costs if the tenant defaults or needs to leave early.
No one can guarantee that a retail location will perform. But you can make a better decision by understanding the risks, costs, and options before committing.
When you do face that situation, there is rarely a perfect solution. It is always beneficial to engage someone who has worked through these situations before and can help evaluate the options while looking out for your best interests.
The best time to ask what happens if a location doesn’t work isn’t after you sign the lease. It’s before.
Have questions about a retail lease, a sublease, or an early termination? Contact Connor DeBry and the Legend Commercial team to talk through your options before you sign, or before you make a move.
Frequently Asked Questions
Can I get out of a commercial lease early?
Usually not without the landlord’s cooperation or a cost. Common paths include subleasing the space, assigning the lease to another business, or negotiating an early termination fee. Which options are available depends on your lease language and generally requires landlord approval.
What is the difference between a sublease and a lease assignment?
In a sublease, another business occupies the space while the original tenant generally remains responsible for the lease. In an assignment, the tenant’s interest in the lease is transferred to another party, often when a business is sold. Even with an assignment, the original tenant may not be fully released from every obligation.
How much does it cost to terminate a commercial lease?
There is no standard amount. Landlords price a termination fee around the cost and risk of replacing the tenant: leasing commissions, tenant improvements, free rent, and operating expenses during vacancy. Because those costs are uncertain, a termination fee can be the most expensive way out.
Related Reading
This article is for general informational purposes and is not legal advice. Every lease is different; review your specific lease with a qualified attorney before making decisions.
Connor DeBry is a commercial real estate broker with Legend Commercial in Salt Lake City.
