Breaking a Commercial Lease When Your Business Fails

Business closures can be very complicated processes. When a company shuts down, a business owner still needs to pay vendors, manage employee terminations, and resolve asset ownership. 

One of the most financially painful pieces of closing a business is often the lease. Commercial leases are long-term legal obligations that don’t automatically end just because a business does. If you signed a five-year lease two years ago and your business is closing today, you may still owe three more years of rent.

This is a serious problem for most business owners, who naturally need to understand how and when commercial leases can be broken. Will you really be expected to make payments on rent if your business is closed? What if you can’t afford to pay rent at all – will you be sued? 

Our Naperville business law attorney can help you understand your options before you make any decisions.

Does Closing Your Business End Your Commercial Lease?

Closing your business does not terminate a commercial lease on its own. A commercial lease is a binding contract between you and your landlord. Unless the lease contains specific language that allows early termination, or your landlord agrees to release you from the contract, you are still legally responsible for rent for all of the rest of the lease term. This is true even if the space your business occupied is standing empty. 

In Illinois, commercial leases are governed primarily by contract law rather than the more protective statutes that apply to residential tenants. That means the terms of your specific lease document will be the primary guide for what happens if your business closes. Illinois commercial landlords generally have strong legal standing to pursue unpaid rent.

What Should You Do About Your Lease if You Know Your Business Is Closing?

Read your lease carefully before you do anything else. Specifically, look for:

• Early termination clauses. Some leases allow tenants to exit early by paying a fee or giving advance notice.
• Co-tenancy clauses. Relevant in multi-tenant properties, these can sometimes affect your obligations.
• Force majeure provisions: Language that may excuse performance under specific extraordinary circumstances could get you out of your lease payments. 
• Personal guarantee language: This determines whether your personal assets are at risk if the business cannot pay.
• Assignment and subletting rights: You may have a path to transfer the lease to another tenant.

If your lease includes a personal guarantee, which is common in commercial leases for small and mid-sized businesses, your individual financial exposure extends beyond the business entity itself. This means that you personally may be responsible for making lease payments if the business fails. 

What Options Do You Have for Getting Out of a Commercial Lease?

There is no single right answer, but there are several legitimate paths that might be options. Our contract negotiation attorney can look through your commercial contract with you and negotiate directly with your landlord or landlord’s attorney if necessary. 

Negotiate Directly with Your Landlord

Landlords often prefer a negotiated exit over a long legal dispute over rent. An empty space with a tenant who cannot pay is a problem for the landlord as well. In some cases, landlords will agree to a lease buyout. This is a lump sum payment in exchange for releasing you from future obligations. In other cases, a landlord might accept a structured settlement for less than the full remaining balance.

The strength of your negotiating position depends on factors like the local commercial real estate market in DuPage County, how much time remains on the lease, whether the space is in a high-demand area, and how your relationship with the landlord has been.

Sublease or Assign the Lease

If your lease allows it, subletting the space to another tenant or formally assigning the lease to a new business can relieve you of ongoing rent obligations. This requires landlord approval in most cases and does not always fully eliminate your liability, depending on how the lease is written. Nevertheless, it can significantly reduce what you owe.

File for Business Bankruptcy

Chapter 7 bankruptcy liquidates a business and can discharge many debts, including obligations under a commercial lease. Chapter 11 bankruptcy allows a business to reorganize and includes a mechanism under federal bankruptcy law to walk away from a commercial lease. This means the business can formally reject the lease, though the landlord may have a claim for damages as an unsecured creditor.

In Illinois, business owners considering bankruptcy should understand that the process affects not only the business entity but potentially personal guarantees and individual assets as well. This is an area where getting legal guidance before making any decisions is very important. 

Negotiate a Deed in Lieu or Lease Surrender

Some landlords will agree to a formal lease surrender, which is a written agreement terminating the lease in exchange for you vacating, leaving behind any improvements, or making a partial payment. This is usually a better option than simply abandoning the space, which can expose you to a lawsuit.

What Happens if You Just Walk Away from a Commercial Lease?

Abandoning a commercial space without a formal agreement is one of the riskiest things a business owner can do. Under the Illinois Code of Civil Procedure (735 ILCS 5/9-213.1), landlords pursuing unpaid commercial rent must make reasonable efforts to mitigate damages by attempting to re-rent the space. However, if they cannot, they can pursue the full remaining balance from the tenant.  

If the landlord cannot re-rent the space quickly, they can sue you for the unpaid rent, costs of re-renting, and potentially attorney fees depending on your lease terms.

If a personal guarantee is involved, any judgment can follow you personally. It can damage your credit, put your personal assets at risk, and hamper your ability to start a new business in the future.

Contact a Naperville Business Law Lawyer Today

The process of wrapping up a business can be very stressful. At Gierach Law Firm, we have the financial and legal background to help you evaluate your options clearly and move forward. Call a Naperville business law attorney at Gierach Law Firm at 630-756-1160 today for a consultation.