FAQ’s Concerning Breaking/Terminating A Commercial Lease in Arizona

If a landlord or tenant does not act with sound judgment and good legal advice, he/she/it may risk significant legal liability and financial loss.

Why would a Tenant or Landlord Wish to Break or Terminate A Commercial Lease Before Term Is Up in Arizona?

When circumstances change unexpectedly, commercial landlords or commercial tenants may seek to terminate leases prematurely for a variety of reasons.  Among the most common are:

  • Tenant company becomes strapped and stressed and is just not making it financially
  • Tenant believes it made a mistake and rental rate is excessive based on market and/or there are other problems with the leased premises (bad location, not well-suited for the tenant’s business
  • Tenant believes the landlord was responsible for certain misrepresentations in the original lease negotiations (You might expect a claim against the broker, but they are usually experts at relying upon liability disclaimers)
  • Tenant company downsizing and doesn’t need and can’t afford the space they committed to in the lease
  • When first renting, commercial tenants are often excited about new business opportunity for their business. Real estate brokers are oftentimes good salespeople and realize that if they close the deal, they get their commission and aren’t there to guaranty business success.  Alternatively, sometimes tenants can be greatly impressed/victimized by an overly optimistic real estate presentation
  • Tenant company believes the landlord is negligent in upholding its obligations under the lease detracting from tenantability of their premises or even believing rental space is unusable for intended business use.
  • Major health conditions develop such as Coronavirus and usual business is significantly reduced or even screeches to a halt. The Arizona landlord-tenant laws will undoubtedly have new case law and statutory precedents set relative to the advent of the Coronavirus.  Already interpretation of the term ‘force majeure’ or its lease term equivalent is an issue of controversy.
  • Landlord company wishing to sell leasehold premises, but can’t do so subject to particular lease
  • Landlord company concerned about negligence claims relating to its ability to fulfill its obligations under the Lease.

What Steps Can A Commercial Tenant Take to Protect Its Interests Regarding Potentially Terminating or Breaking A Lease Short of Its Full Term?

Hopefully the landlord and tenant have both practiced ‘preventative medicine’ by negotiating good lease terms in the first place, so the lease has reasonable protections/escape clauses for both sides regarding the circumstances that may develop which could lead to early lease termination.  From the commercial tenant’s standpoint, here are suggested safeguards which can be written into the lease:

  • A ‘break clause’ or ‘early termination clause’. When circumstances change unexpectedly, a commercial tenant may seek to terminate its lease prematurely for those specific reasons which are hopefully spelled out in the lease.
  • Reasonable sublease and assignment provisions
  • Rather than committing to long-term leases, the commercial tenant, when possible, should agree to a reasonably short term to start and then have two or three renewal options sometimes with guaranteed increase rates. The tenant may worry about not locking in rates it might achieve through a longer commitment, but in many instances it is better to maintain flexibility and negotiate good rates prior to the expiration of each term or term extension.
  • The principals of the commercial tenant should avoid or limit commitments on personal guarantees, since such guarantees can be financially dangerous for the principals if the Tenant’s business is not successful.

What Suggested Safeguards Can the Commercial Landlord Rely Upon If It Wishes to Terminate the Lease for Cause Prior to Its Expiration?

Most commercial property leases provide a commercial landlord with early termination rights in particular circumstances.  Usually these rights include the right to terminate a lease if a tenant fails to timely pay the rent or if a tenant violates certain provisions of the lease.  There ordinarily are various other ‘early out’ provisions beneficial to the landlord.  Oftentimes the lease termination provisions provide notice and cure periods that must be honored before a lease can be terminated.  These provisions usually require written notice to the other party in breach regarding the specifics of the breach and the lease provision being violated.  They also usually allow the tenant an opportunity to cure such breach before terminating the lease.  If the breach is timely cured, the lease ordinarily may carry forward.

What Are the Consequences for the Tenant and/or the Landlord for Wrongfully Terminating A Lease?

For the Tenant:  In addition  to being responsible for all back rent accrues through the date of termination, the landlord may also have the right, depending on the lease, to accelerate and charge the tenant for all future rent that would have accrued through the lease term if the tenant had not wrongfully terminated..  In addition, wrongful termination by a tenant in some instances can result in the forfeiture of any abated rent previously offered by the landlord, which may also become due and owing upon the termination.  Of course an award of attorney’s fees and court costs may also apply.

For the Landlord: A landlord who wrongfully terminates a lease may also risk legal and financial exposure upon proof the of the wrongful termination and breach of the lease.  When the termination is followed by removing the tenant from the premises through a legal eviction proceeding or otherwise, the landlord may further risk exposure for a wrongful eviction action and potential claims for conversion of the tenant’s property where the property remains in the leased premises from which  the tenant was removed. (Alleged violations of the lease and/or A.R.S. 33-361 and A.R.S. 33-362). Wrongful eviction may also be proven if the landlord lawfully terminate a lease, but does something unlawful in the process of removing the tenant from the Lease Premises.  Of course an award of attorney’s fees and court costs may also apply.

What Options Are Available When Circumstances Change Unexpectedly and The Commercial Tenant Needs Legal and Financial Relief Relating to the Lease/Or Landlord Has A Change of Circumstances and Needs Early Termination?

Advice to Tenants to Bolster Discussions

Good communication between the landlord and tenant is most important

Early Discussions with the landlord’s representative should take place, in person if possible to discuss the particular issues and see whether the situation might be improved or altered so as to avoid the termination.  Make sure the proposed representative is one with authority or the ability to get the ear of the ultimate decisionmaker.  From the tenant’s standpoint, this is not always easy because commercial properties are often managed by property management companies and the owner of the leasehold premises is not always available for negotiation. Retaining a good real estate attorney can be helpful in this regard because he or she will get the attention of those who count and attempt to resolve issues.

Before the discussion:

  • Make sure you have and have reviewed all the pertinent information and documentation in advance of the meeting
  • It is recommended you consult with an attorney prior to the meeting concerning your rights and the situation, but you may not wish to include the attorney in the meeting, so that a more personal approach may be utilized. The landlord may think also that having an attorney present is meant to intimidate or complicate issues that might otherwise be resolvable.

At the meeting and during the discussion:

  • Try to present global terms for resolution at the meeting.
  • Locate and discuss possible replacement tenants if you have identified good candidates.
  • Show how reaching an agreement could very well benefit the landlord by saving costs and legal fees if there is interruption versus achieving a smooth transition (through negotiation or subletting or assignment) and possibly improving quality of tenancy if there is negotiated resolution.
  • Make required payments, if possible or if not, what good faith payments you can. Explore rental reduction or at least payment arrangements.
  • If circumstances are really pressing, vacate the premises, but leave property in rentable condition
  • Emphasize landlord often wants to avoid having an empty vacant space in a building.
  • Assure landlord you are trying to help them avoid or subject themselves to an extended legal process.

Be aware and emphasize to the landlord that if a tenant breaks the lease and vacates the leasehold premises, the landlord still has the duty to mitigate the tenant’s damages.  This means a landlord must take reasonable steps to put in place a replacement tenant as soon as possible so that its damages cease to accrue, or at least are decreased.

What Are Some of the Issues Which Need to Be Addressed in Lease Termination or Re-Negotiation Discussions?

What is the potential for a Lock-Out under the Lease and/or A.R.S. 33-361 ?

If you as a commercial tenant fail to pay rent, the landlord may be able to reenter the property and change the locks.  But the lease can change the procedure and dictate how much notice you must be give, along with other terms.

How Do Commercial Landlord Lien Rights Pursuant to the Lease or A.R.S. 33-362 Enter the Picture?

The landlord has a lien on all property of the tenant in the premises, so some tenant consider removal of certain property before the situation escalates.  The definition of what property is removable become important and is governed by the terms of the lease agreement, Arizona statutes and fixture law in Arizona.  There are certain exemptions to the landlord lien law.  Generally, it does not apply to property on the premises belonging to someone else.

Contact Us Today

If you need an attorney to negotiate a commercial lease termination or modification, please call The Law Offices of William D. Black at (602) 265-2600 or email us and we will be happy to provide an initial free consultation.  Remember, if a landlord or tenant does not act with sound legal judgment based on good legal advice, he/she may risk significant legal and financial liabilities