Commercial Real Estate Investment/Tenant Landlord Lease

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QUESTION: Hello! We just started a 5 year lease with no personal guaranty on May 1st and we already want out. We signed the lease in Septemeber, right before the financial collapse. Our lot is half empty and our sales are terrible. Rent including extras is $9,200 and already I can't afford rent. I spoke to the landlord about our situation and he reduced rent to $2,500 per month plus 5% gross sales to the end of the year. They plan to go back to original rent in January. I already know I won't be able to afford it come January. Miracles won't happen!!

What can I do? We've decided to stay at least to the end of year to show some good faith and give it a shot. In the meantime, we have to open our previous location to generate cash flow to make ends meet. If we bail from this location in January how much can the landlord sue me for? Is it just the months he has the space vacant? So if its two months, it's only $18,400? Could he put a lien on my inventory in our other location?

I guess what I'm asking is, what would our liability be, for how long and for how much? Thank you so much for your help.

ANSWER: Jon

There are a lot of unanswered questions in your story.

first, I assume you are selling cars or trailers or something requiring a lot -- that doesn't really matter, inventory is inventory.

-- you say you will stay in good faith -- there is no good faith in this situation as you are trying to get out of your comitment -- whats the point of having leases if they are to be broken like this?

2nd, as I have told many people, I am based in Toronto Canada.  Our laws vary considerably not only between Canada and United States but also your laws will vary from state to state.

3rd, in order to fully understand the details of your situation, I would have to review the entire lease the you signed.

A lease typically has "remedies of default" which the landlord can exercise under such circumstances.  I don't know if you release says he can lean your equipment or inventory, or change your locks etc. please read the section in your lease which pertains to remedies of default.

3b) there may also be state law which overrides what your lease says.

4) most perplexing is that you just signed this lease, and within three months can already predict what the future of five years under lease will hold.

When starting a new business, the first thing you need is a business plan.  Typically people don't start driving somewhere unless they know where they're going and if it is somewhere that they have not been before, they would want to consult them out before they go there.

A business plan may seem mundane or redundant but the exercise of going through the template in answering all the questions he asked you a very clear picture of the future.

Most businesses fail because they don't have a clear vision or map.  

Evidently you have done this business before as you mentioned previous location.... this brings up more questions... why did you move from the previous location if it was doing better than this location?  If it is strong enough to support both locations, perhaps you shouldn't have "bailed" from that location in the first place.

5) I have never seen a landlord, in any country, dropped Renfro 9200 per month to 2500 per month -- especially basing the balance of 5% of your gross sales which is almost impossible to police.

6) again on an assumption, I assume if you signed a five-year deal you probably got some free rent up front if this is the case, it sounds to me like you are moving from location to location based on the free rent. Of course I could be wrong because I don't know the whole picture.

7) you signed a lease with no personal guarantee; that's a pretty wide open statement, I don't know if you put it in your own name, or in a company name.  Here in Ontario either way you are still not out of the reach of the law by trying to hide behind company anyway as the officers of the company are still liable to some degree.

8) what can he sue you for? If he has a good lawyer he can sue you for lots of things, the most obvious is nonpayment of rent, perhaps the fact you may have blocked the deal from another potential tenant,

Can he restrain your goods or lean your equipment, and it depends on your state and your lease.

Here in Ontario, a typical commercial lease, the landlord can change the locks, restrain goods, lein your equipment and sell it but only in an amount equal to what is owing from outstanding rent, and/or damage to the property, that type of thing.

But he must also prove that he did everything he could to mitigate his losses, in other words you can't simply leave the property vacant for five years and not try to release it, then sue you for the balance -- he must be able to prove that he tried to lease it but until that time that he actually finds another tenant, you are on the hook.

Your counter to that of course is proof that you can't pay. The judge might come up with some type of an arrangement where you can pay something per month - again this varies from situation to situation and depending on what Judge you have.

What would I do in a situation?  First of all I wouldn't put myself in that situation in the first place by making a proper plan.

In your situation I would go back to the landlord explain the situation and see what he would be happy with.  You want him to sign some sort of quitclaim agreement with you -- basically something saying that we absolve each other from our obligations -- this might cost you something to do that.

Live and learn

Best, Phil


---------- FOLLOW-UP ----------

QUESTION: Hey Phil, thanks for getting back to me so quickly. I did leave out some important factors and I apologize for that. If you don't mind, I'd like to address some of these.

1. We are a sports store and sell team licensed products like jerseys, apparel, novelties, framed photos etc. I mentioned lot because the the store is located in a modern day outdoor "mall." It's called a lifestyle center. At any rate, our section only has a few stores in it. In fact, it's only 38% occupied. It's been pretty tough!

2. Good faith - I said this because the Landlord was nice enough to decrease the rent that much so we figure we can stay there for 6 months and try to make it work. If it doesn't work, we can show them our numbers, prove to them we're advertising and doing our part etc. and ask the Landlord what will it take for us to get out of the lease. Numbers don't lie and we at least show that we tried. I'm not sure this will mean anything. Should we just try to talk to him now about all this? I assume this will cost us a ton of money though, money we really don't have.

3. Remedies of Default - In regards to inventory thi sis what the lease states:

At Landlord's option, Tenant will be in breach  of this lease and Landlord may declare a default upon the occurrence of any of the follwoing events:

There exists and is permitted to continue for 20 days after notice thereof has been delivered to Tenant or Landlord, an involuntary lien of any kind or nature upon any of the properties or assets of tenant which alone or together with other such involuntary liens exceed in the aggregate $50,000.00, unless other arrangements are made satisfactory to landlord permitting Tenant to contest the validity of any such lien.

Now, what does that mean?

4. Yes, we've only been there for 3 months or so and we want out. We moved from a store located in the Outlets to a store that is now located next to LL Bean. Leaving the Outlets and being next to LL Bean our train of thought was that we wouldnt have to discount as much and we'd be able to sustain the increase in rent. Simply put, we were looking for greener pastures. We're doing $5K and $6K months there which just won't cut it. It's pathetic! Doing those numbers and having to pay $9,200 in rent we have concluded that it will never work. In addition, I have to advertise like crazy! The monthly expenses are just insane. We made a mistake and need to cut our losses here. It's either now or later. We just can't afford it!

5. How can I go about doing this? I do not want to bail. I want to go to him and be honest and just tell him it's not going to work. It's a 5 year lease worth over $500,000 so I'm scared that it's going to be extremely expensive to get out of the lease especially since its tough times right now and there are many empty stores around us. My concern is that he'll come after us if we don't come to an agreement on getting out of the lease. My brother and I only make $35K or so a year. No big deal but its a living. We're concerned that he'll come after our inventory/the other store if we do break the lease and just leave.

6. Finding another tenant - In regards to rent, we'd only be liable for the amount of months the space would be vacant correct? What if they brought in a temp tenant into our space for the holiday season and then left in January? Would we again become liable for rent since that tenant moved out? Or would we only be liable for when we left to the time the temp tenant moved in?

7. Tenant Allowance - The Landlord gave us $22,500 for interior build out of the space. The Landlord provided the vanilla shell and I assume he spent $50,000 or so building a 2,500 sq ft space for us. Now, we're working on getting reimbursed for that so once we get that money is that something that we could use as negotiation? Offer to give that money back? In your opinion, how much money do you think it will cost us to buy us out of the lease? What would you do in our case as our Landlord? I mean, if you were to see our numbers continue to struggle month after month and know we can't afford full rent and probably will never afford it what would you do as our Landlord?

8. Free rent - I wish! :) No, we never had free rent. We were at our previous location for three years and moved. We thought we'd do better if we were in a full price retail location next to LL Bean than we would being in an Outlet. We were looking for greener pastures! It's really as simple as that. A stupid but honest mistake. We're honest guys Phil, we just made a mistake.

9. No guarantee - We are an LLC, I just signed the lease as a member of the LLC. No personal connection or guarantee whatsoever.

10. Can we sue him? - I understand he can sue us. The question is will he? However, what about us suing him? We had a real estate broker negotiate this deal for us and he claims that they told him they were only looking for permanent deals/tenants, but I know that was a lie. They signed temp tenant deals in 2008, the same time we were negotiating our deal. Can I counter sue for that? Although, I'm not sure I can prove that unless my real estate broker would be my witness. Also, I was given a map of tenants that were said to move into our section/lot of the mall and 'till this day only 1 or 2 have moved in. Isn't that inducing a tenant, us, to move in? That's kinda shady I would think no? Do I have anything to stand on here? I'm just wondering because we've spent easliy $50,000 to $60,000 on build out etc. for this location and thats a ton of money for guys who only make $35,000 a year.

Phil, in conclusion do you think we can get out of this lease legally? I mean go to the Landlord, level with him and work something out? Only 2-3 months in do you think he would understand? Would you understand? How would you as our Landlord handle our situation? Am I doing the right thing by trying to negotiate with him instead of just bailing? Will that win any points at all with him?

At any rate, thank you so much for your time! Thanks Phil, Jon

Answer
OM Gosh, this "follow up" seems to go all over the place.

"can get out of this lease legally?" - No. A Lease is a commitment in writing. You should honour your commitment. What makes you think you can "get out of it legally?" Otherwise, what's the point of having a lease?

"Can we sue him?" - Yes! Anyone can Sue Anyone for ANYTHING! Will you win? Im not a prophet. If I could predict your win or loss, I would be buying up lottery tickets.

as I said in the prior answer, there is no black and white in law - only gray at best!

I'm sure you have seen homicide cases on TV where there was clearly a killer with a "smoking gun" and yet they get off on a technicality or a "shadow of doubt" -- If you saw the movie "Chicago" this is the best example of it. There were women in a prison who almost clearly killed in premeditated murder - but Richard Gere steps in and says it "wasn't like that at all!" "she was weak while he was strong, yet they both reached for the gun"

but there is not this kind of debate in your situation. You would not get a trial jury or commercial case.

commercial litigation is an expensive proposition. Even if you have a clear-cut case ( and you don't) you could go to court spent years getting a ruling -- even if you won, the defendant could simply say they do not have the ability to pay you and ask for some type of lesser payment, long payment plan, or no payment at all! and if you won, they could also simply launch an appeal and tie you up in court for years well you have to keep paying your lawyer!

Win or lose the lawyer always get paid so frankly, they don't care whether they win or lose, as long as they have clients to keep paying them!

Your best and frankly only option to negotiate something with your landlord.

the rest of your questions with regards to remedies of default etc. -- I could not possibly answer that without reading your entire lease. Your lease may have references to this or it may not - I don't know it could've been written on a handkerchief, or it could be a 200 page novel.

Sorry I am probably not telling you what you want to hear but this is the truth.

Good luck

Best, Phil  

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Phil Nicols

Expertise

Legal issues which are specific from state to state.

Experience

Licensed Realtor since 1987, Broker Since 1991. Ontario Canada real estate -- Commercial, investment, leasing, business brokerage

Organizations
Stockwell Realty Corporation

Publications
www.StockwellRealty.com

Education/Credentials
Real Estate Council of Ontario, Registered under the real estate and business brokers act 2002

Awards and Honors
A few from past organizations I belong to. Now with my own company, it's hard for me to give myself awards.

Past/Present Clients
Dealt with both small as well as regional tenants, individual investors to syndications.

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