Expert: Phil Nicols - 10/17/2008

Question
Hi,
  I'm on the board of a nonprofit agency that depends solely on donations.  We have an office in Butler, Pennsylvania.  We are in the 3rd year of a 5 year lease.  We are coming to the point where we won't be able to continue paying rent.  The lease says if we break it we must pay for remaining time.  We can't.  Can you give me help in how to approach the landlord to let us out of the lease.

Answer
Don

Of course there is no black-and-white answer.

It depends on a lot of things;

* Who is your landlord?
* how sophisticated is he?
* how much space do you have?
* what's it worth for this landlord to sue you?
* how is the least guaranteed?  Is it on a company name?  Or is it a personal guarantee?

If it's on a company name, you could just walk away and tell them to sue the company, leaving nothing in the company to sue.

Second, the landlord has to realize even if he did sue you, what does he possibly have to gain -- and if he gets a judgment against you, he still has to collect it.  Your defense to that would be the you simply don't have the money and you could arrange with the court some ridiculous repayment plan like a dollar per month over the next 50 years (I've seen even more ridiculous payment plans) in the meantime just as all the company and say that it doesn't have any ability to pay.

I brought up the point about space because, if it's a small space, and it's not much to rent, this is in your favor because there is less for him to sue for.

There are also other ways of getting out of the least besides walking out.  Get a good local commercial real estate agent to sublease it.  You must have a clause in your lease somewhere that says you're allowed to sublease it.

Even if you only got half of what you're paying to get someone in there, you would be mitigating your losses so that even if he was able to arrange a judgment for the balance of the lease, you would only be responsible for the balance less what you are getting from the subtenant.

Of course this all varies from state to state as well and from country to country.

I have been on both sides of the fence, representing tenants and representing landlords and having been a landlord myself.

I know in my own case as a landlord, most of my tenants weren't worth the chase.  I had people polled midnight moves on me that I knew were going to walk, but it came down to a factor of economics.

It would have cost me lots of money up front to take the case to court, and then as I've said even if I won a judgment, they're still a matter of collecting it.

You could also bring up to your landlord that rather than invest his time money and energy into suing you, maybe he could spend that energy in finding a more suitable tenant -- maybe you could help them as part of your repayment plan.

Keep in mind a lease is a promise.  When you sign the lease you promised to do your part.  Now you're backing out of that promise for whatever reason.

This is the same problem going on across the United States today with all the failed loans.  A lone is a promise.

I know at these hard times for you right now all you can see is what's going on close to you, but if you look at the big picture -- where does this put the entire economic outlook?

I'm finding that we have the haves and have-nots unfortunately.

Landlords with "B & C class" properties are finding them very hard to rent, while the "A listers" have a lineup of tenants that want to get into their buildings!

These are the landlords that have the say in the matter.  They are in a position of power, and today I'm finding that they will not accept a mom-and-pop shop!  Which in turn makes it harder for small business!

The landlords with the best properties are only accepting regional tenants, one said they know they can pay the rent -- and if they can't pay the rent, then there is something to sue for!

This is bad economics for the country as a whole because we are separating the rich from the not so rich.  But as you can see even the big fall because the big banks etc. got that way from feeding on the worker bees -- and if there are not enough worker bees, they cannot support the system this is why the system failed.

There's also the issue of law.  We have all seen a guilty man go free as well as a not guilty man be sent to death row.  A good lawyer can tell a good story and make an innocent man look guilty or vice versa.  Again this comes down to money -- look at O.J. Simpson and his dream team!

Unless you are a nationally known nonprofit organization, I personally wouldn't go after you.  If you are a smaller one-off nonprofit organization, I would hope that your landlord would see the same situation.  Is he going to spend $20,000 up front to try to sue you to see that he can get nothing, or is he going to spend that time and money and energy into trying to release a space?  Most of the time it's just a question of economics.

Of course you see a lot of companies now in the US opting for protection under Chapter 11 (I think that's the chapter you guys use in the US -- I'm based in Canada) Bankruptcy pretty much says that all bets are off.  If the landlord wants to push you to that, and you just have a number company on the lease, really you have nothing to lose just tell him that the company is bankrupt -- sign up for Chapter 11 for protection anger against creditors and basically are scot-free!

It's unfortunate but this is usually what happens.  We spend so much time putting leases together.  In some cases I've seen leases up to 200 pages long!  Yet on the other hand a one-page letter from the bailiff saying that you are bankrupt quashes all that!

Good luck with your future ventures.

Best, Phil

Phil Nicols
Broker of Record
Stockwell Realty Corporation
905-427-0026
www.StockwellRealty.com