Nonprofit Accounting Basics

Some Legal Issues to Consider When Trying to Get Out of Your Office Lease

Feb 22, 2021

Benjamin Takis

Takis Nonprofit Law PLLC | Sustainability Education 4 Nonprofits

As the financial pressures on nonprofit organizations mount and many employees continue to work remotely from home, nonprofits are increasingly examining their options for getting out of their current office leases. This issue is particularly problematic for nonprofits whose current office leases are set to expire a year or more from now. A careful assessment of your organization’s legal rights and options is critical to navigate this issue effectively.

This post will highlight a few key issues to consider, but it is especially crucial to get specialized help from local commercial real estate experts. Commercial leases are very complex and specialized, and the laws and real estate market conditions vary depending on the state or local jurisdiction. A commercial lease broker and/or real estate attorney are essential to help you assess your organization’s rights and bargaining leverage.

Assuming your landlord is not willing to negotiate modifications to your current lease, you might consider whether subletting all or a portion of your space is a possible option. This may be the solution that your landlord is most willing to accommodate, although this puts all of the burden on your organization to find a suitable sub-tenant willing to move into the space (no easy task in this environment, although your commercial lease broker may be able to help). Landlords generally have discretion over whether or not to approve a proposed subtenant, so plan accordingly to involve the landlord in this process.

Planning Tip – If your landlord has not shown a current willingness to negotiate modifications to your lease, you should plan to try again periodically. Market conditions are changing rapidly, so your landlord’s circumstances are likely to evolve and change. It is possibly your landlord may be more willing to negotiate at some point later in the near future.

Alternatively, your organization may have to confront the issue of terminating your lease early. Lease agreements generally don’t make this easy, and landlords rarely welcome this approach. Nonetheless, there are a few important points to keep in mind regarding early termination.

Possible escape hatches: Your first step should be to review your current lease agreement and applicable law very closely with professional help to determine if there are any circumstances that would allow you to terminate without liability to the landlord (albeit not without risk of a lawsuit contesting this action). For example, if your landlord has materially breached the agreement, violated the laws applicable to commercial leases, or if some termination clause in the contract has been triggered.

Early termination fees: Your lease may or may not contemplate payment of a lump sum fee in the event of termination. If it does, you will need to crunch some numbers to determine if it makes sense to pay the fee and move on.

Duty to mitigate: Your landlord will generally have a duty to mitigate the damages if you do terminate early. This generally means that the landlord must make reasonable efforts to find a new tenant to take over your lease. While this is not a gamble to take lightly, some organizations may be comfortable with the risk and this may be preferable to continue to be locked into a lease that is not optimal.

Attorneys’ Fees and Indemnification: Some leases attempt to impose the costs of collecting delinquent rent or bringing a lawsuit to enforce the lease agreement. These provisions, if present, could substantially increase the risk of breaching the agreement or terminating early. This is another reason why a close review of the lease agreement is a crucial first step.

Nonprofits currently locked into office leases that they are not using and/or cannot afford face a problematic set of choices. Regardless of which strategy you pursue, reviewing your current lease in fine detail and getting professional advice from a commercial lease broker and/or real estate attorney should be your first steps.