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How to handle early lease termination

One problem with tenants is that they sometimes leave the premises before their lease is up. They might do so because their business is such a success that they need more square footage, but often they break the lease because their business is failing and they have run out of money.

This is a bad position for the landlord, especially if the rental market is down and a new tenant might not come aboard right away or pay as much as the previous tenant.

A strong contract is the best defense

The best thing a landlord can do is prepare for the eventuality. A strong contract is the best defense. A quality contract will spell out exactly when the tenant will be in default of the lease and the landlord’s specific remedies.

It is important that, as the landlord, you refrain from issuing anything in writing that the tenant can use to argue that there is a lease termination agreement or the tenant can use to claim constructive eviction from the premises.

Hopefully, the tenant will offer a reasonable lease termination fee. Assuming the tenant’s financial position is tenuous, you will be among many creditors seeking relief and if you can receive financial relief before the other creditors, you can begin looking to rehabilitate your rental space.

If your tenant seems financially dodgy from the get-go, you can enter into a month-to-month lease that offers you both the flexibility of moving on if the business doesn’t work out without the problems of a legal fight. Of course, long-term security is waived as well, but for the short-term, month-to-month leases can make sense.

Options lead to higher rents later in the lease

A landlord who predicts a tenant might have trouble with cash flow also has the ability to write options into the contract. This gives the tenant the option of leaving the contract at two years but if the tenant chooses to stay, then the business is locked into three more years at a higher rate. The advantage of this is that the business is two years older and more established, and therefore more likely to survive a rent increase.

There are two courts in Virginia that handle commercial tenant/landlord disputes – the General District Court and the Circuit Court. Cases with lower cash amount that don’t require jury trials or discovery are heard in the General District Court, which typically moves faster than the Circuit Court. The landlord also has the option of appealing a District Court decision to the Circuit Court.

A landlord might win such a case and the landlord might be able to get some rent out of the tenant, but this is always an uphill fight when there are multiple creditors and few dollars to spread around. The easiest case comes with a solid contract at the beginning of the lease spelling out the ramifications of any possible outcomes.

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