Expert: Jim Avancena, CPM - 8/22/2011

Question
Our non-profit is currently half way through a 3 year lease of a small commercial property which both our organization and the building owner knew we couldn't afford from day one. Because of such bad decisions this has made the agreement the lease from hell.

For the first time in 18 months we are finally behind in our rent and don't know how to move forward. We have no problem with moving to a more affordable building but we'd like to try to honor our lease as much as we can. We're also more than willing to take on a smaller space in the building we're in. Problem is the owner shows no interest at all in letting us redo our lease or letting us out. He probably would throw us out immediately if he could find another renter.

We really don't know how to move forward with this. I'll try to give as much as the history as I can to see .... if you can help.

Here's the history:

In looking for small building to lease in order to house our new non-profit we spotted a building that had been vacant for quite some time and called about it. Upon learning its cost we told the owner that it was 5 times more than we could afford. He then suggested to me that I consider seeing if there were other organizations that could come in with us that we could sublease to. I'd never done that before but ran a few ads to see if there were any prospects and found a few. Upon telling the owner our find, we signed a 3 year lease with him and that's when all troubles started.

Almost every tenant we got to come in to help, soon had financial problems and couldn't pay, which made it almost impossible for us to pay. His words were .. you are still responsible for paying rent, so get them out and get new ones which we continually worked to do. While we were always able to pay our rent every month however, this same process has repeated itself over and over again for the last year and a half. The difference is even though we have paid our rent every month we have not been successful at all as we were in the beginning at subleasing the suites. Several times I have asked him to let me out of the lease and he will not. I've also asked him several times if we could just rent one space in the building ourselves and he take the rest of the building on to rent it out himself and he constantly reminds me that ... that wasn't our agreement.

This huge strain has caused us to have both the electric and gas turned off in the past ... gas turned off twice (its off now) yet even in all of that we have always paid our rent. Last month was the first month we were not able to pay rent at all and with the utilities off although we're constantly seeking new tenants I don't know how the next month is going to be paid. Keep in mind the rent is 5 times more than we ourselves could ever afford and he knew that as well as we did before the agreement was signed.  That's why he suggested getting tenants and subleasing. I've always thought since it was his suggestion that he would be more lenient. It has been the worst experience in my life,.

This venture has totally side tracked us from what our non profit was established to do. It has now gotten us into the business of building management which we knew nothing about and have been very unsuccessful at and as a result of it BOTH ventures are now terribly failing.

There are a number of other more affordable places we could move to, even areas in the building that we can handle ourselves IF he would redo our lease or let us out of it, but he won't. To help us meet the note and get back on track  over the last month we've even brought new people in at much lower rates but because WE'RE behind now he can throw us all out - even the new tenants who are paying.

I really don't know what to do.

Should we keep trying to bring in new tenants even if its only half paying the rent?

Should we just leave and let the new tenants deal with him?

Should we just let him throw us all out?

Should be just keep emptying our organizations bank account to pay rent?

We want to do the right thing but I don't know what to do and or even what else to propose. His only words to me are ... "pay your rent" which we can no longer afford.

In all of this is there something else that I can propose or do or stop doing that might help.


Karl

Answer
Karl:

Sorry to learn about your situation.  You are not as knowledgeable about the commercial real estate industry and the current leasing environment as the landlord, and you made decisions that seemed to make common sense, without apparently the special expertise you needed.

There are many questions I could ask about the specifics of your lease terms, but it is unlikely there is any magic I could perform.   A "standard form lease" doesn't usually contain terms that can help your non-profit at this point.

Do you have any idea how much your landlord had to spend of his own funds "up front" (prior to when you moved in) to prepare your leased premises for your firm's occupancy?    If you move out now, the landlord will consider a significant portion of the improvement funds that he/she spent to prepare your offices (painting, carpeting, etc.) as a financial loss.   The landlord also loses the remaining rental income he has anticipated once your firm signed the lease.   Landlord's are not often willing to give up any of the lease income stipulated over the term of the lease.  He probably needs your rent more than you imagine.

I realize your firm is very short on funds, and there is no guarantee the following will work out, but you could make an offer to the landlord to pay him/her/it a cash "cancellation fee" that is equal to perhaps 3 to 6 months of the remaining rent (the amount is negotiable) you would pay under your lease if the landlord will agree to give you a full release from ANY & ALL the remaining obligations under the lease.

However, for that offer to be of ANY interest to the landlord; 1.) The landlord will have to believe that the current strength of the area leasing market gives him a reasonable chance of re-leasing your space before the period the cancellation fee approximates in rent expires, and, 2.) The landlord must sincerely expect that your firm truly has no means of continuing to pay your rent in the future (i.e., the idea is that collecting 3 to 6 months rent is better than nothing) or that your firm is about to file for bankruptcy protection almost immediately.  Note that if you or your partners - or both - signed a "Lease Guaranty Agreement" at the time you signed the original lease agreement that allows the landlord to file a lawsuit to go after your personal property in the event your firm does not pay the rent, this option will not work.

Unfortunately, I am not an attorney and cannot assure you that the suggestion above, or any other idea, might legally work for you, so you should contact a local commercial attorney immediately and ask them to advise you of your legal options to attempt to work your firm out of your predicament.

Your situation is not uncommon during the continuing recession.  I wish I had a better response for you.  

Good luck.

Jim