Businesses are always changing—this is particularly true as economic conditions can change fast for good or bad, and is no different for industrial users. In some cases, a warehouse tenant might be growing fast and is already at max capacity. In other cases, their warehouse space might have excess capacity. In either instance, their existing space may no longer fit their needs. This may require a renegotiation, or termination, of their warehouse space.
So, what are the options to terminate an existing warehouse lease? We take a deeper dive in this article.
1. Look at the Lease Termination Clause. It’s rare but some industrial lease have what’s known as a “termination clause”. Start by reading this clause carefully. It spells out the circumstances under which the tenant can terminate their lease. This might give tenants the flexibility they need to downsize or relocate during the term of their lease. Just be sure to notify the landlord under the terms of the termination clause in the lease.
Tenants should have open, honest communication with their landlord to explore which alternatives may be palatable.
2. Discuss Termination of Lease with Landlord. Truth be told, most landlords want to keep their tenants happy—especially if there’s potential for that tenant to continue paying rent. But let’s say that’s not an option. Let’s assume that the tenant can no longer afford the space. Maybe there’s an opportunity to downsize in the current space and sublet the remaining space. If a business is closing, a complete termination may be inevitable. Tenants should have open, honest communication with their landlord to explore which alternatives may be palatable.
There are many factors that may influence how a landlord response.
For example, where you are in the lease period may be a driving factor. If you are early in the lease term, terminating the lease might be more challenging versus a tenant who is nearing the end of their lease term—at which point, the landlord would need to start looking for a new tenant anyhow.
Another reason the landlord might be open to an early termination is if market rates have substantially changed. If your rent is below current market rates, the landlord might be more willing to terminate so they can re-lease the property at market rent.
A landlord might be open to an early termination if market rates have substantially changed.
3. Explore Spaces Within the Landlord’s Portfolio. If your landlord owns multiple industrial properties, and if they have an alternative warehouse space that better meets your needs, the landlord may be open to an early termination of your current lease if you commit to signing a lease at one of the other spaces. This is often a win-win, especially if you need a larger space and are committing to a new long-term lease with the landlord. This keeps you in the landlord’s portfolio as your company grows. They might also be willing to forfeit any early termination fees if you’re relocating within their portfolio.
4. Sublease the Space. If you have talked to the landlord, and if the termination clause does not meet your needs, then consider subleasing the space. Most commercial leases will allow a sublease of the space to another warehouse user under certain terms and conditions. The first step in subleasing the space is to put the property back on the market. Tenants should work with an experienced industrial broker, such as our team at ComReal, who has a strong grasp of the local market, including knowledge of which tenants may be actively looking for space. This will help to streamline the process. If the new tenant is looking for a longer-term lease or at higher rates, the landlord might be willing to terminate the current lease without penalty.
In some cases, warehouse tenants feel trapped by their leases. However, businesses’ needs are constantly evolving. Market conditions are always changing. What seemed like a logical lease structure three or four years ago may no longer meet a tenant’s needs today.
This is why it is so important to have open communication with your landlord. Tenants are never truly “stuck” in a lease. There are other alternatives worth exploring. As always, we recommend contacting our Industrial team to explore the different options. Always work with a broker who specializes in industrial properties and has market experience. Those who specialize in industrial properties have unique knowledge that can make the lease termination much less stressful for all parties involved.
What seemed like a logical lease structure three or four years ago may no longer meet a tenant’s needs today.
Is your business looking to grow or downsize its warehouse space? Contact us today to explore your options.
About the ComReal Miami Industrial Team: The ComReal Miami Industrial Team has been assisting companies with their South Florida real estate needs for over 30 years. The industrial team specializes in the sales and leasing of industrial properties. Visit Warehouses Market and/or call 786-433-2380 for more information.
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