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What is an exit clause in a commercial lease? 

On Behalf of | Jan 2, 2023 | Real Estate Law

When a commercial lease is drafted, it may include a termination agreement or an exit clause. This gives the business owner a chance to break the lease early. However, very specific conditions need to be met in order for them to be allowed to do so.

Additionally, it’s worth noting that the landlord could also include a termination clause that gives them the option to break the lease early. Landlords don’t typically want to do this because they would rather keep tenants in their space, but it just shows why it’s so important for both sides to understand the document that they’re signing.

Why would an exit clause be used?

There are a lot of different reasons why people decide to use an exit clause, but it is generally financial in nature. For example, the person may have a set amount of sales that they expect to make every year. If they fall short and so the space becomes unaffordable, or if they can see that it is simply not a good fit for their business due to the reduced sales, then they can leave before the term of the lease is up. Even if they signed on for 3 to 5 years, they may decide to leave after just one or two.

This is certainly not the only way to break a lease. But these clauses are one of the easiest ways because all of the details will be defined in advance. Negotiation doesn’t need to happen and there are fewer disputes between both sides. They have agreed to this arrangement upfront, and they simply have to honor it.

Understanding your lease

Whether you are leasing space as a commercial tenant or renting it out to someone else as a property owner and investor, an exit clause is just one part of the documentation that you need to consider. Be sure you know about all of the legal steps to take when signing or breaking these agreements.