As businesses grow and develop, their specific requirements for commercial space may change from what was initially envisioned. Accelerated business growth may lead to a scenario in which a business has outgrown its commercial space. In other situations, businesses discover that the amount of utilized commercial space doesn’t meet their needs as well as they originally thought. In either scenario, businesses often need to renegotiate the terms of a commercial lease which may extend for several more years. If this occurs, businesses need to understand the implications of exiting a commercial lease early and providing proper notice.
When a commercial tenant in Arizona needs to disengage from a lease agreement before the pre-agreed term is officially complete, there are three primary avenues along which the situation can progress: surrender, abandonment, or a negotiated reduction of the lease term. This article will highlight the surrender and abandonment scenarios of breaking a commercial lease.
In a surrender, the landlord agrees to free the tenant from the remainder of the lease so that the tenant is not required to pay any unpaid rent balance. The advantage of this approach is that both parties can move on quickly. The landlord can locate and lease to a new tenant and the tenant can move to another location that better fits its needs. Whether this scenario occurs often is related to the local commercial rental market. If demand for commercial space far exceeds supply, a landlord often allows for surrender because it knows that a new commercial tenant will be found quickly and will agree to an extended lease term at a higher and more profitable rate than the previous lease provided. Conversely, if supply outpaces demand, a commercial landlord will probably not agree to a surrender of the lease because it has little to no assurances that a new tenant would be quickly found and for the same monthly rate.
If the landlord refuses the accept the tenant’s surrender of the lease, and the tenant decides to leave the property anyway, the situation is called abandonment.
Under Arizona law, abandonment of a commercial lease may be grounds for legal action on the part of the landlord, including holding the tenant fully liable for any unpaid balances for the entire term of the lease. While it is also true that Arizona commercial landlords are obligated to mitigate their losses, if at all possible, by finding a replacement tenant, finding a suitable commercial tenant is usually more difficult than replacing a residential tenant. Depending on the current commercial real estate market, and the condition of the property when it was abandoned (or otherwise made timely mitigation impossible for the landlord), a business may still end up owing the full unpaid rent balance.
How much notice qualifies as “proper” notice under these two options? It all depends on the terms of the particular lease agreement. A business may be required to give 30, 60, or 90 days’ notice, with 30 days being the most common time frame. Business owners need to be absolutely certain they understand the lease requirements, and provide formal written notice as far in advance of any deadline as can reasonably occur. In addition, a detailed review and analysis of the lease’s “make good” clause is necessary so proper procedure and efforts can be followed to return the state of the unit to its original move-in condition. Last but not least, a business should obtain written confirmation from the landlord stating that the business has honored the “make good” clause so it can have its deposit or bond returned.
© 2018 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved
This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
