Can My Business Break Its Commercial Lease in Texas?

Read the lease for an exit before you plan one

The cheapest way out of a commercial lease is a door the lease already has. Look for: an early termination option, often tied to a fee equal to several months of rent plus unamortized build-out costs and commissions; a contraction right; a co-tenancy or go-dark clause in retail leases that allows termination if an anchor leaves; a kick-out tied to sales thresholds; a relocation clause; and the assignment and subletting section. Also check what counts as a default by the landlord and whether the tenant has a termination remedy for it. Finally, read the guaranty, because the owner's exposure may be the real driver of the decision.

If none of those applies, the lease will usually say what the landlord can recover when the tenant leaves early. That clause, read with the mitigation statute, sets the price of leaving.

What leaving without a right to leave costs

A tenant that moves out and stops paying has breached the lease. The landlord may terminate and sue for damages, or, if the lease allows, keep the lease in force and sue for rent as it comes due, or accelerate the rest of the term. Typical components of the claim are unpaid rent through the date of re-letting, the shortfall between the contract rent and the new rent for the remainder of the term, brokerage commissions and build-out costs for the replacement tenant, and attorney's fees under the lease.

Property Code § 91.006 caps that exposure in one important way. A landlord has a duty to mitigate damages if a tenant abandons the premises in violation of the lease, and a lease provision that purports to waive that duty is void. The landlord must make reasonable efforts to re-let, and the tenant's liability is reduced by the rent those efforts produce or should have produced. What counts as reasonable, and who has to prove what, is covered in must a commercial landlord mitigate damages after a tenant leaves.

The security deposit is usually the first thing applied. Under Property Code § 93.005 the landlord must refund whatever is left within 60 days after the tenant surrenders the premises and gives a forwarding address, with an itemized list of deductions; under § 93.011 a landlord who keeps the deposit in bad faith owes $100 plus three times the amount wrongfully withheld and attorney's fees.

Route one: negotiate a termination

Most early exits end in a signed termination agreement, not a lawsuit. Landlords agree because a cooperative surrender with a known payment beats a dark space, a damages suit and a mitigation fight. A tenant's bargaining power comes from the market (a space that will re-let quickly costs the landlord little), from a replacement tenant the tenant has already found, and from the landlord's own risk under § 91.006 if it refuses to re-let.

A termination agreement should state the surrender date and the condition of the premises, the termination fee and when it is paid, what happens to the deposit, a mutual release of claims (including any claims against the guarantor), and whether the tenant's liability ends completely or continues until a replacement tenant signs. Vague language on that last point is the most common source of a second dispute.

Route two: assign or sublease

If the lease allows assignment or subletting with the landlord's consent, the tenant can hand the space to another business and either step out entirely (assignment) or stay on the lease while collecting rent from a subtenant (sublease). Many Texas leases say consent may not be unreasonably withheld, and courts hold landlords to that standard when the lease uses it. If the lease is silent on the standard, the landlord's discretion is broader.

Two cautions. An assignment usually does not release the original tenant or its guarantor unless the landlord agrees in writing, so insist on an express release. And a sale of the business that transfers control of the tenant entity is often defined in the lease as an assignment requiring consent.

Route three: the landlord breached first

A tenant can be excused from performing when the landlord's breach is material, but the bar is high and the tenant must be able to prove it. The recognized theories are:

• Constructive eviction. The landlord intended the tenant not to enjoy the premises, did a material act that substantially interfered with the tenant's use, the act made the premises unusable for their intended purpose, and the tenant moved out within a reasonable time. A tenant who stays and keeps operating for months after the problem usually cannot claim constructive eviction.
• Breach of a specific lease covenant that the lease makes a condition, or that goes to the heart of the bargain, such as a failure to deliver the space, to provide required HVAC or to honor an exclusive-use clause.
• Wrongful lockout. Property Code § 93.002(g) lets a tenant locked out in violation of that section either recover possession or terminate the lease, and recover damages and fees. The rule is explained in whether a commercial landlord can lock out a tenant in Texas.

Texas does not imply a right to withhold rent or to repair and deduct in a commercial lease, and most leases make the tenant's rent obligation independent of the landlord's performance. A tenant who stops paying because of a landlord breach usually hands the landlord a default. The sounder sequence is to give written notice of the landlord's default under the lease's notice clause, allow the cure period, document the failure, and then either terminate under the lease or move out and defend the landlord's claim on the ground that performance was excused. The general rules on when a breach is material enough to stop performing are in material versus minor breach.

Route four: the lease itself is unenforceable

This is rare, but worth checking. A lease of real estate for a term longer than one year must be in writing and signed by the party to be charged under Business and Commerce Code § 26.01(b)(5). An oral five-year lease, or a long lease that only one side signed, may be enforceable only as a shorter tenancy. A lease signed by someone without authority, or a lease whose essential terms were never agreed, raises similar issues. These arguments are fact-specific and are usually a defense in the landlord's suit rather than a reason to walk out.

Example

Suppose a Plano software company has 40 months left on a 60-month office lease at a rent that is now above market. The lease has no termination option, allows assignment with consent not to be unreasonably withheld, and carries a personal guaranty from the founder capped at six months of rent. The company finds a staffing firm willing to take the whole space at 85 percent of the current rent. The landlord refuses consent without giving a reason. The company's counsel sends a written request documenting the assignee's financials and the lease standard, and notes that under § 91.006 a landlord who declines a qualified replacement will have difficulty proving mitigation later. The landlord counters with a termination: the tenant pays four months of rent, assigns the deposit, the staffing firm signs a new direct lease, and the guaranty is released. The company's cost of leaving 40 months early is four months of rent, because the lease language and the statute together left the landlord little to gain from refusing.

Personal exposure of the owner

If an owner signed a personal guaranty, the company's exit is also the owner's problem. Texas courts read a guaranty strictly according to its terms, so the first question is what it covers: the full term, a capped amount, or liability that ends when the tenant surrenders in good standing after notice (often called a good-guy clause). Any termination agreement should release the guarantor expressly. The details are in personal guaranties on commercial leases. Without a guaranty, the landlord's claim is against the tenant entity only, unless it can show grounds to pierce the corporate veil.

What to do before giving notice

1. Get the complete lease file: the lease, amendments, commencement letter, guaranty, any estoppel certificates and all notices sent or received.
2. Build the ledger: what has been paid, what the landlord claims, and any disputed CAM or repair items.
3. Document any landlord defaults with dated photographs, repair requests and the landlord's responses.
4. Survey the market for the space and, if possible, line up a replacement tenant before approaching the landlord.
5. Model the cost of each route: termination fee, assignment economics, or the mitigation-adjusted damages if the company simply leaves.
6. Have a litigator review the notice before it goes out. A notice that uses the wrong method, the wrong address or the wrong grounds can forfeit a termination right.

Tina Wysk represents tenants and landlords in commercial lease exits and the disputes that follow in Dallas-Fort Worth. The firm's real estate litigation practice covers negotiated terminations, assignment disputes and the defense of landlord damages suits.