What to do if Restaurant Tenant wants to terminate a Lease Early?

Question

The restaurant owner of my New Jersey commercial space is looking to terminate his lease early since business isn't doing well and isn't able to find someone to purchase his business. There is currently no exit clause for the tenant and I have 3 months of security deposit.

Also, I'm slightly on the fence on what to do with the restaurant equipment. Not sure if the owner is deciding to sell it or leave it.

Any suggestions on a course of action that would be most suitable in today's time?

H. Jack Miller · Answer

Does the lease have any personal guarantees? If it does what's the financial strength of them. If they are strong, you need to hold their feet to the fire until you lease it to someone else. If not dont throw good money after bad in a legal action. Sounds like the equipment is the tenants, if so is there debt or UCC's on it. is so you can make a deal with lender and if you get a new food tenants yo take over payments, if not depending on what lease says and you do. It could be yours, maybe a nice perk for find another food tenant. Either way seems like you need to find a new tenant.

Nathan Taylor · Answer

I would offer to let them out of the lease if you have another tenant lined up. Tell them once a new tenant signs a lease you will end their current one. See if they will help you get the space rented since it would be in their best interest to do so. I rent to a lot of small/new businesses so I get a personal guarantee to encourage them to make every effort to work with me on the process. It's not perfect, but it helps.

Dan Wallace · Answer

If a tenant like this was indicating they were wanting to leave, I would closely monitor. I would also recommend pulling a UCC listing to see if you could figure out if they had financed any of the equipment, etc. I am not entirely sure of all jurisdictions regarding tenant improvement/attached equipment ownership, but I would want to know if possibly some other creditor was going to possibly at some point try and come in a remove any equipment/improvements.

I used to have a general guidelines that it is the third restaurant to occupy a location that makes it successful. That partially has to do with the fact the costs of improving a restaurant location initially was so expensive and the by the time the third operation came into a property, the costs of entry were much lower.

Ronald Rohde · Answer

Lots of options here, legal remedies dictate leverage, but business decision will lead the financial impact.

I'd try to find a new tenant, negotiate a termination with existing tenant, find out whether the equipment is fixture (belongs to LL) or has carved out financing. Its a big difference and there is only one legal answer.

Bruce Woodruff · Answer

Just let them go and find someone new ASAP. Up to you how firm you want to be with a business that is already failing.....you could push them into BK....

Bill B. · Answer

If the equipment is/was new. He probably leased or purchased it on payments. I would assume someone’s going to repossess it. If it was used and is in good condition ask him to leave it and look for a new restaurant tenant. I know a couple of restaurant owners that only look for new locations where restaurants are leaving.

James Storey · Answer

In situations like this, I would negotiate a lease buyout. Without an exit clause, the tenant will need to do a sublease of the space or offer to buy you out for the net present value of the lease. The tenant could probably leave equipment to cover a portion of the net present value along with the security deposit.

First thing is to mention that if the tenant would like to exit out of the lease, they would need to help to find a new tenant and then you can negotiate any buy out options from the differential between their current lease and the new tenants lease.

Remember, a lease is a form of debt and it has to be paid back.

James Storey, CCIM

Theresa Harris · Answer

Your lease should have contained an exit clause.  Start looking to find a new tenant.  If the equipment is his, then it is his to deal with.

What to do if Restaurant Tenant wants to terminate a Lease Early?

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