By: Eric Le
In January 2023, Meta abandoned its San Francisco office, an office space with 400,000 square feet in downtown San Francisco.1 Meta had rented out the space five years earlier to make space for the employees behind Instagram. The lease termination was eight years early, as Meta’s lease was set to expire in March 2031.
Meta’s lease termination adds to the already colossal—21 million square foot—inventory of vacant office space in SF. That number amounts to an office vacancy rate of 27.6%. For comparison, that vacancy rate was 3.7% before the global pandemic.2
Over on the East Coast, Meta is also dismantling its office in Manhattan. Salesforce is doing the same. Last year, about 20% of Manhattan’s offices were completely vacant.
As the pandemic ebbs and flows, and COVID restrictions phase in and out, it’s hard to predict the necessity of an office space. The late 2022 massive tech layoffs only exacerbated the problem. Many businesses and organizations are transitioning to full-time remote work. When they do, they must decide whether to terminate their commercial leases early. So, here are a few things to be aware of if you are faced with the decision to terminate early.
Surrender obligations
Your commercial lease is likely to have a clause that addresses your surrender obligations. In general, the tenant must return the commercial property, such as an office space, to a broom-clean state. A broom-clean state means all of the tenant’s personal property is removed from the premises. Alternatively, some commercial leases will allow the tenant to return the space as-is. An as-is return is favorable for the departing tenant because it allows the tenant to leave the property in its current condition and with any existing faults. If your commercial lease already demands a broom-clean return, it might be worthwhile to negotiate with the landlord for an as-is return.
Considerations for tenants
Tenants wanting to relieve their obligations under a commercial lease must be careful. In Pennsylvania, a landlord must accept the tenant’s early termination in order for the tenant to be free of her obligations, such as the obligation to pay rent.3 Therefore, the best practice for a tenant is to document the landlord’s acceptance of the surrender in a written lease termination agreement. The landlord must explicitly accept the surrender of the property and do so in writing. If a landlord does not accept your surrender, you are legally liable for the ongoing rent.
Considerations for landlords
On the other hand, landlords should also be cognizant of their rights if a tenant terminates early. In Pennsylvania, a landlord may repossess a property even if she did not accept the tenant’s early termination. The mere fact that he resumes possession is not of itself a sufficient foundation upon which to predicate either an acceptance of a surrender or an eviction.4 For example, the landlord has the right to reenter the premises to clean and renovate the space without accepting the tenant’s surrender. However, landlords must be careful in repossessing the property to make sure that she does not create a hostile environment for the tenant to reoccupy the property, resume the landlord-tenant relationship, or renew the commercial lease.
Most importantly, the landlord also has the right to start subletting the premises without accepting the tenant’s surrender (thereby not relieving the tenant of his obligations under the lease).5
Security Deposits
Most commercial leases will require the tenant to commit to a security deposit. In Pennsylvania, the applicable law for security deposits is the Pennsylvania Landlord & Tenant Act of 1951. The good news is that the act provides robust protection for tenants, such as the right to receive your security deposit and any interests accrued.6 The bad news is that only residential tenants are entitled to these rights.7 Therefore, commercial tenants in Pennsylvania do not have a statutory right to recover their security deposits.
Instead, the amount and the return of the security deposit are up for negotiations in Pennsylvania. Thus, landlords and tenants in Pennsylvania must be intentional when reserving their rights to the security deposit when they enter a commercial lease. Lack of a security deposit provision in the commercial lease may limit a tenant’s rights if she decides to terminate early.
Key Takeaway
These are just a few among the many considerations a tenant and landlord have when facing an early termination of a commercial lease. It’s also important to note that terminating early is not just beneficial to tenants—some landlords may want to terminate early, too. Tenants may want to terminate early because there is no longer a use for an office. Landlords may want to terminate early because they need the space for another lucrative opportunity. Thus, if you are the party that receives the early termination request, you must recognize that you have the upper hand and negotiate your departure accordingly.
This post has been reproduced and updated with the author’s permission. It was originally authored on February 1, 2023 and can be found here.
Minh “Eric” Le, at the time of this post, is a third-year law student at Penn State Dickinson Law. He has interned for the Federal Public Defenders, and the Pennsylvania Office of the Attorney General, in the Financial Enforcement Section. Eric also worked as a Summer Associate with Buchanan Ingersoll & Rooney. Eric is a first-generation college and law student. He was born in Vietnam and raised in Ho Chi Minh City, before moving to Brooklyn, New York, in 2002.
Sources:
1. Sydney Boyo, How San Francisco Can Tackle Two of its Biggest Issues: office vacancies and housing, CNBC (Dec. 30, 2022, 8:05 AM), https://www.cnbc.com/2022/12/30/two-of-san-franciscos-biggest-issues-office-vacancies-and-housing.html.
2. Natalie Wong, Tech Layoffs Mean Even More Empty Offices in NYC, San Francisco, Bloomberg (Jan. 10, 2023, 1:45 PM), https://www.bloomberg.com/news/articles/2023-01-10/tech-layoffs-remote-work-mean-more-pain-for-empty-office-buildings?leadSource=uverify%20wall.
3. Hochman v. Kuebler, 53 Pa. Super. 481, 484–85 (1913) (noting that tenants’ obligations under a commercial lease are not discharged unless the landlord accepts the surrender).
4. Kahn v. Bancamerica-Blair Corp., 327 Pa. 209, 213 (1937)
5. Id. at 214
6. 68 Pa. Stat. Ann. § 250.511a
7. 68 Pa. Stat. Ann. § 250.512 (“This section shall apply only to residential leaseholds and not to commercial leaseholds.”)
Generally, in Pennsylvania, one of the components of a commercial lease is the Work Letter. It states the expected work that each party should do and the expected deadlines to complete the work to prepare the premises for occupancy. Most tenants overlook the Work Letter while negotiating and signing the lease and do not understand their work share because architectural drawings are costly and time-consuming to produce. A tenant should negotiate the work allocated or secure the preliminary drawings to get the price estimates. Also, a tenant may be able to convince the landlord to bear the cost of some improvements. However, most commercial leases will require the landlord’s prior written approval if the tenant wants to make any alterations to the premises. Therefore, it is in the tenant’s interest to address the tenant’s requirement for improvement in the lease itself.
Most commercial landlords prefer long-term leases with automatic renewal terms because they secure long-term rent. Long-term leases greater than 3 years also ensure the business’s continuity and stability. However, such long-term commitment comes with risks for tenants in Pennsylvania. Many landlords require a personal guarantee from business owners when it comes to leasing commercial spaces. Such a long-term lease can be risky because most start-ups have a high failure rate, which means that the commercial lease might last longer than the business itself. If this happens, the business owner is liable for rent even if the business has ceased occupying the property.
Dharvi Goyal, at the time of this post, is a third-year law student at Penn State Dickinson Law. Dharvi is from India and is interested in pursuing a career as an in-house counsel. Dharvi has recently finished her internship at Dickinson College OGC office and is about to begin her internship with a law firm.
