Four Ways to Get Out of Your Lease, Part 2

Before my schedule bogged down in tinsel and year-end deadlines, I posted on a question that’s been almost common: “I signed this lease before the economy tanked. How can I get out of it?” Typically, the business has contracted to a degree that it no longer needs, or simply can’t afford, all (or any) of the leased space.

While there are no magic bullets, there are four ways to eliminate or reduce the burden of a lease on a business. The first option, explained in Part 1 of this post, is buying out the lease. Let’s now consider options two through four.

Assignments and Subleases.

Oversimplified and misunderstood, subleases and assignments have someone else take responsibility for some or all of your space. They can be useful, but be clear about the differences between the two approaches. Also understand the requirements your lease imposes on your ability to use them. Typical leases give the landlord rights to approve your deal (with you paying for the landlord’s costs in doing so).

Also know that in today’s market, with rents down and vacancies up in many places, the chances of finding a subtenant or assignee (who will expect to pay less rent to you than they would to the landlord) to get you completely off the financial hook, are low. You may have to settle for a deal that leaves you responsible for some part of the rent obligation.

In an assignment, the new tenant takes over your lease with the landlord, but that might not take you out of the equation. An assignment does not automatically release the original tenant or personal guarantor from liability. If the new tenant doesn’t pay the rent or otherwise defaults, the landlord will come looking for you. Therefore, you may not have improved your situation at all, and may have made it worse. If an assignment doesn’t include a full release from liability, you may be better off subleasing.

In a sublease, you become the landlord, or in legalese, a sub-landlord (if your lease IS a sublease, a sub-sub-landlord, and so on). Your liability to your landlord is not changed by a sublease, but you have a better chance to protect yourself than in badly handled assignment. Since your sub-tenant is paying the rent to you, you’ll know when rent is being paid (or not), and you’ll have the legal right to pursue the sub-tenant for the unpaid sums. On the other hand, a sublease can be trickier than an assignment in that you need to make sure the critical provision of your lease and the sublease match up.

Take Backs

Maybe the landlord will agree to take some or all your space back. Maybe the Mayans are right and the world will end on December 21, 2012 this year, so why worry about your lease? But seriously, a take-back may not be likely, but it is worth thinking through. If your business has a below-market rent, yet it is still struggling in this economy, your landlord may see the benefit in taking space back. If market rents are down, it may be necessary to sweeten the deal with an agreement to cover some or all of the spread between your rent and the new tenant’s deal.

Extend the Lease

It sounds counterintuitive, but extending the term (lengthening the lease) might solve your current problems with the lease. There is no free lunch (or magic bullet); you will pay more over the long run with this approach. The landlord agrees to reduce your rent in the short term if you agree to a longer term with higher rents in the future. Thus, you and the landlord are betting that business will get better and your company will be able to handle that increased burden. If you have personally guaranteed your lease, kicking the can down the road could be a terrible decision. Either be sure the Mayans are correct about 12/21/12, or carefully work through the idea with your attorney, before agreeing to a deal like this.

Remember, a premature exit from a lease is best negotiated before you sign it, and the best way out of a bad lease, or any bad contract, is not signing it. Your business lawyer can help you think through the issues.

A Degree of Practical Wisdom: Law School by the Numbers

Early this year, as part of my ongoing lament on law schools and the challenges of training good, affordable lawyers for human-owned business, I offered my own story as an example of a financially sensible approach to buying a legal education. My starting salary as a lawyer was about twice my student loan balance, which I thought made sense. The typical debt load of many of today’s law grads seems completely out of line with the salaries those young people will receive, assuming they can even get a law job.

Turns out, I was right on the money, so to speak. Jim Chen, the Dean at the Louis Brandeis School of Law at the University of Louisville is publishing an article entitled A Degree of Practical Wisdom: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates’ Economic Viability. In a much, much more scholarly analysis than I brought to the question, he comes to the same conclusion. The article will appear in the William Mitchell Law Review.

Even as the cost of attending law school has increased, law school graduates’ job prospects have not kept pace. In recruiting new students, law schools rarely if ever address this economic reality. Whether that failing arises from blissful ignorance, complacency, or willful disregard is ultimately a matter of moral judgment.

If we can’t explain why the Law Degree Factory ignores reality, at least I can do my part to help those thinking about law school to be somewhat objective about the decision to pursue law as a career. The typical reasons for going to law school: To advance justice; To serve the underprivileged; To right wrongs and ensure peace, which Dean Chen cites, are great. We need lawyers who feel that way. We just need for them to be able to make a living and pay off their loans, too.

Quick Bites - November 23

New tools provide a wider use for social media. Employee theft is a huge concern for small businesses. What you can learn from Joe Paterno’s estate plan. Relating a business sale and Thanksgiving might seem like a stretch, but check out the similarities in this round of Quick Bites.

Raymond James Makes Its Social Media Move
By: Davis D. Janowski, Investment News

It’s inevitable. The legal barriers to business use of social media are evolving and companies are finding new tools to help them jump compliance hurdles.

“The firm is using the Socialite platform from Actiance Inc. so that its financial advisers can use social media to prospect for new clients and connect with existing clients while still being compliant with Finra rules.”

Is Your Small Business at Risk of Employee Theft?
By: Rieva Lesonsky, Network Solutions

We all want to work where we are trusted, but there is nothing wrong with your business having systems in place to be sure trust isn't abused. As President Reagan said: Trust, but verify.

“Worldwide, businesses lose an average of 5 percent of their annual revenue to internal fraud, according to a study by the Association of Certified Fraud Examiners (ACFE) reported in MarketWatch. Nearly one-third (30 percent) of companies affected by embezzlement have under 100 employees. And companies that size lose an average of $150,000 to the crime. Could you afford a loss that big?”

Inside Joe Paterno’s Estate Planning Play
By: Liz Skinner, Investment News

Whatever the true motivation, there are valid estate planning reasons for high net worth individuals, whether business owners or football coaches, to transfer assets. Consult an estate planning attorney to make sure your plan is up-to-date.

“Joe Paterno's transfer of homeownership to his wife in July most likely wasn't an attempt to shield assets before a sexual-abuse scandal hit Pennsylvania State University's football program. Instead, the move was by the legendary coach more likely made to take advantage of expiring estate tax rules, lawyers said.”

5 Reasons Selling Your Business is Like Thanksgiving Dinner
By: Barbara Taylor, The New York Times

The analogy is a bit of a turkey, but there's enough here to make it worth a quick read. Missing is the concept of tradition. Parties, buyers especially, want the deal done a certain way because they've always done them that way. They, like your great aunt's insistence on canned cranberries, can get over that and try something fresh.

“Thanksgiving dinner without the pumpkin pie would be a major letdown. Building a successful business that has no transferable value seems equally disappointing. Selling your business and cashing out after years of hard work is the ultimate reward. Prepare yourself and your business well for the day you will leave, and when you do, you will savor a slice of success that many business owners never enjoy.”