Turning Early Lease Exits Into Smart Wins

Tenants don’t plan to leave early, but it happens—and the way you respond determines whether you eat losses or engineer a smooth, profitable handoff. We open the playbook on early lease exits with practical steps that protect cash flow, reduce downtime, and keep relationships intact.

We start where the problems begin: at lease signing. By setting expectations around maintenance responsibilities, personal guarantees, assignment and sublease rights, and make-good standards, we reduce confusion and speed resolution when circumstances change. When a tenant calls before doing a midnight run, we can move quickly—listing the space, coordinating showings, and aiming for a same-day turnover where the new tenant starts paying as the old tenant walks out.

From there, we compare two paths: clean terminations with a new lease or subleases that keep the original tenant on the hook. If the outgoing tenant’s rent is above market due to past concessions, subleasing plus a rent delta can make the landlord whole and give the new tenant a fair rate. We also cover who should fund free rent requests, how to recapture unamortized broker commissions and tenant improvements, and why airtight documentation—consents, estoppels, amendments—prevents disputes. Along the way, we talk restoration and make-ready: repainting to neutral, basic repairs, and small tweaks that make a space show-ready and cut vacancy weeks.

Not every exit is a failure. Growth, right-sizing, relocations, acquisitions, and even military orders change plans. Our approach stays steady: be approachable, gather the numbers, and design the least disruptive path. Sometimes that means bringing in an operator consultant to salvage a business; other times it means helping a tenant move and backfilling their old space with minimal interruption. If you’re a landlord, broker, or property manager looking for a clear framework to handle early exits without drama, this conversation gives you the steps, scripts, and safeguards to do it right.

Enjoyed the conversation? Subscribe, share the show with a colleague who could use these tactics, and send us the next topic you want us to tackle.

Learn more about Blue Commercial Properties on our website.

Transcript

Blue Dirt Premise And Focus

Michael Carro 0:00

Welcome to Blue Dirt, the podcast that digs deep into the foundation of commercial real estate investing. Unlike most real estate shows that focus on deal making and market trends, Blue Dirt gets into the nuts and bolts of what truly builds long-term value, the building itself. We break down how to spot deferred maintenance before it costs you, why a solid preventative maintenance program is a game changer, and how triple net leases can maximize your investment returns. We'll also explore the importance of strong landlord-tenant relationships and how they drive stability and growth in your portfolio. Whether you're a seasoned investor or just getting started, Blue Dirt gives you the practical knowledge to make smarter, more profitable decisions in commercial real estate. It's time to get your hands dirty and build value from the ground up. Let's dig in. Welcome to Blue Dirt, where even idiots can make a killing in commercial real estate. I'm Michael Carrow with SVN Southland Commercial Real Estate, joined by Don Rudhead with Blue Commercial Property. And today we're going to talk about what happens when you, as a landlord or a broker, or property manager, but you have a tenant that signed a longer-term lease and they want to get out early. So that's kind of what we're going to talk about, all the different ways to have that discussion, what you can and can't do, and um how you can make a successful negative into a successful positive. So um, so with that, with that, we'll just kind of well chat. I'll I so let's go back to when they first signed the lease. It's an exciting time. It's an exciting time. Everybody's happy. Um, when I sit down with people for their lease signing, I go through a lot of the parts of the lease. Even though they may have read it, even though their attorney may have gone through it completely, I like to let them know what I think are really important parts of the lease, specifically related to their obligations to maintenance versus the landlord's obligation to maintenance. That's kind of one of the bigger points for me, because that's where Don always runs into a lot of issues with tenant responsibility. Um, but I also like to have the conversation that, hey, listen, what if, blank, in this case, what if they need to vacate because the space is too big, too small, their business is not going well, or it's going too great, they still need to exit. There's a variety of reasons why a tenant may need to leave. Uh, maybe they're in the military and they got orders to bolt out. Um, those are a little bit more unique, but they do happen, especially in an area that you have a militar military basis. So the conversation at that table at that beginning of that relationship goes something like this. Tenant, if you need to vacate, what I recommend you not do is what we call a midnight run, right? You know, it's not going well. So in the middle of the night, you get all your stuff and you leave. In that scenario, I can't help you. We are gonna go legal day one. We're gonna go and find you, and we're gonna do our best to sue you and and and and bring you to justice. What's better is if you know in and and you as a tenant know in advance if you're not doing well. Let's just use that example. You're not doing well and and you're struggling. Call me early. Tell me what's going on. And what we can do is we can try to help mitigate your loss with the leased space. So, hey, Mike, things aren't going well. Um, I don't think we can be in the space that much longer. And so what I'll do is I will try to find a replacement tenant for them with the ideal scenario that on the last day of the lease that they st that they stay, the new tenant takes over and starts paying rent the very next day. Now, there's a lot of variations of that. But the reality of it is is it's not that they wanted to go out of business. They're just going out of business. Now, most of our leases have a personal guarantee. So they're personally guaranteed the lease. So even if their business goes belly up, they're still on the hook for that. And our goal as landlords is to mitigate their loss. All right. And so I let them know hey, the goal right now is you have got to pay your rent until we find a replacement tenant to take over your rent obligation. And so let's work together. Let's give me as much time as possible. Don't wait to the bitter end because it doesn't help the tenant to relocate and and uh or even close down and give us the time to find a new tenant. So I'm gonna pause there from your perspective as a property manager. You deal with this a lot on on our behalf. Uh, what would you like to add into that part of the conversation?

Don Redhead 4:49

We sing from the same sheet of music, so I think it's helpful um for the tenant to hear it. Yeah, once again, you're you're describing the situation that is is overly positive, is overly for for many tenants, uh a lot to take in, right? They're they're they have this big lease in front of them, they've they've tried to read it the best of their ability, and they're signing it. So they're trying to drink that in, they're trying to drink in and all of us. So day one, as we kind of take over, we don't start off with doom and gloom, but it's something that we echo uh very much so that you know, as tenants come around or as we can see they're maybe struggling a little bit, um, you know, we share that that with us, uh share that with them that hey, we're we're really problem solvers at heart, and that we're here to help you um should it be that type of situation that you actually need to get out because the worst thing you can do is just run. The best thing you can do is we run faster. Well, we have a checklist.

Michael Carro 5:57

So so they're it's so it's a time of of as Don kind of reinforced, they're excited. Nobody ever plans to fail. But our whole our hope is that we don't want you to fail either.

Don Redhead 6:08

We want you to stay there forever.

Sublease Versus New Lease Decisions

Free Rent Periods And Who Pays

Unamortized Commissions And TI Recapture

Michael Carro 6:09

We want you to stay there forever. But if things aren't going the way you expected them, an open dialogue and and really strong communication helps us all out. Because our goal is never to go after somebody. That's not what we want. We want what's positive for every tenant. And so, so that's the first part of the conversation we have. They get it, and um, and so then they they go on down the road, they open for business. So let's say two years later, I get that call. Hey, listen, you know, we I know we signed a five-year lease, it's just not going very well. Um, you know, you mentioned when we were signing a lease that to give you a call, and so what are our next steps? So invariably I will get them to sign a listing agreement to allow me because remember, the tenant controls the space. It's their space. So I sign a listing agreement with them, I put it on the market, and then I coordinate showings and things of that nature to then find a suitable replacement tenant. In most cases, when we find a replacement tenant, um there is a transition period, then I would create two documents a termination of lease and a new lease. So instead of so the the the sublease listing agreement is signed, but I still have the goal of signing a fresh lease with a new tenant and taking the old tenant out completely, if it makes sense. It doesn't always make sense, and I'll tell you why. Let's say you have a billion-dollar company that is leasing the space with very strong credit. You know you're you're gonna get paid forever, and you've got a guy who's solid, but certainly not a billion-dollar company, you may not want to release that billion-dollar company from the lease. They still may accept this person as a sublease. And so they're still on the hook, but this guy is stepping into their shoes. Or let's assume, for the sake of argument, that billion-dollar company or whatever size they are, the land, they had the landlord do a lot of work for them. And so they're paying $50 a square foot as a lease rate because a lot of their build-out was factored into that lease. But yet going to the open market, the property is only worth $30 a square foot. So if we get a tenant that's willing to uh sign a lease at the $30 a square foot, many times the original tenant will still pay that delta between the current lease rate and what the offering lease rate was. And so everybody still wins. The new tenant got the lease rate at market, the old tenant got somebody to cover at least that $30 a square foot. So a lot of things still happen like that. So, but in the event that I have a good tenant that's current, that the current tenant and the new tenant is also a really good tenant, our goal is to terminate this lease, sign a new lease, and then that way we're not dealing with three different uh people parties in this one lease. So that's our first obligation. The second thing is, is many times a new lease, they need, they want 30 days before they start paying rent. So if if this if they write an offer that says they need 30 days or even 60 days of no rent, well, we present that to the current tenant saying, hey, listen, they want 60 days of no rent. It's up to that tenant to decide because if they they're gonna have to pay those two months of of rent uh to the landlord because the landlord is still intending to be made whole. So many times they'll say yes, and so then they will vacate. The new tenant comes in, the original tenant pays those two months, and that's when the new tenant starts paying. Um, and then we can't forget things that the landlord may have done or expenses that the landlord may have had that weren't fully realized by the old tenant. All right. So as a real estate uh broker, there are commissions paid on leases. Well, if the landlord paid commissions on a five-year lease, but this tenant is vacating essentially after two years, and they hire them to uh to get a new a new tenant in place, well, that's a new commission. Well, the landlord, if the landlord's gonna pay on this new commission, they kind of would like to get reimbursed from the old tenant on an expense that they did not realize. And so that's something that we'll typically ask for back as the unamortized portion of the commission to that landlord. Uh other things might be uh a build out that the landlord did on behalf of the tenant that wasn't fully realized. Again, they occupied uh the space 24 months of a 60-month lease. They might want to get reimbursed. And so this type of language is helpful to be in the lease in the event a tenant vacates uh early. Um, these are some recaptured items. And Don, how do you how do you help a landlord go after these types of items in that scenario, you know, to help mitigate the loss of the current tenant, but yet making sure that the current landlord or the landlord's made whole?

Document Everything And Keep Records

Don Redhead 11:27

Usually it's it's documentation of really the financial costs, right? If you don't have good books and you don't know what those actual construction expenses were, it's kind of hard to go after them, right? So you got to have good financial records to say, hey, yeah, I and have you know records of invoices. Hey, I paid the the real estate broker five grand, right? And I paid $15,000 towards the build-out. So we'll run the the formula, you know, based on the total occupancy as far as the duration, and then say, hey, you only occupied it for this period, and then we'll create that invoice. And then, you know, we can go after them for the full thing.

Michael Carro 12:06

Um, and not everything is a fight. I mean, we have a scenario right now. The tenant signed a 60-month lease. It was tied to a government contract. There's a clause in there that they could get out if the government contract was canceled. Um, they actually had seven months of a 60-month lease left. Uh, and so they are going to pay the unamortized seven months of the real estate commission and the seven months of the unamortized buildup. And it's not an argument. I mean, it's just it was clear and everything.

Don Redhead 12:34

That's what makes it nice when you are dealing with those types of organizations of that sophistication. They this is this is just another day in the life. These guys, they live it, they know this is how it goes. Uh, you're not, it's not emotional. Yeah.

Compassion, Communication, And Win Wins

Michael Carro 12:48

It's just very transactional. So it's it gets emotional when when you have a family that's struggling, you know what I mean? And so, you know, we want to be as as kind and generous as we can, but at the same time, we can't just take a loss because we're, you know, but that's where good communication can help mitigate the loss, lower it to a point that, hey, listen, we're not happy with ourselves, our business didn't work out the way we want it to, but boy, we appreciate you helping us through this process. And that's our goal.

Don Redhead 13:16

Yeah. And it's like we talked about in the beginning and have I've probably always talked about our goal is to have them in the space forever, right? Because even though this is a difficult situation for them, it's a lot of extra work on our side of the equation to help this bad situation, you know, be not so bad.

Right-Sizing, Relocations, And Assignments

Michael Carro 13:37

Well, and and and you know, we're talking about a bad situation. There's a lot of reasons why people leave, right? And so if you got the communication, let's just assume, hey, our business is going so good, the space is too small for us. Well, I can step up, step in as a broker, help them find a new location and help backfill the space. Or, hey, or the opposite, hey, it's too much for us. We want to get into a smaller space. Again, that regular communication can be very, very uh helpful. They're relocating. There's just a myriad of reasons why people leave. It's not just because their business is going, you know, uh going poorly. So understand that good communication. And they might be selling their business. Well, maybe it's a new opportunity to get a whole new lease with this new company. So there's a lot of reasons why people uh might need to exit or consider exit, uh exiting early. You know, it may just be that they thought the if, especially during an acquisition, sometimes, you know, they're competing. Well, we've got a location here and a location there, so we only need one location. Okay, well, why are you choosing this one over our location? And maybe their data is is flawed and you can help them see both sides and that, oh, okay, we only need one, but this actually makes more sense than that. So be an advisor for them, right? They may need improvements.

Don Redhead 14:56

Hey, this one's got whatever, right? Right. And if you are like, no, I'm I want to keep you here. Right. Um, I know we tried that with the the office park in Gulf Breeze. What do you what do you want? We'll we'll totally renovate this complete building uh for you. Uh so it's custom to your workflow, and it's somewhere that you want to to move the rest of your team to versus versus leave. So that, yeah, that's it's but strong communication, being approachable as the landlord or the property management team allows them to have that sense of vulnerability or comfort to come share a failure at the end of the day. Once again, we're talking about both sides, but most of the time it's it's something's not going well.

Michael Carro 15:40

Well, and then how are they going to leave the space? I mean, if you can get them to restore the space to the way it was when they took it over, and I'm not saying tear down walls necessarily, but let's just say somebody had a really random, they had to paint their building pink for some reason. Well, I mean, that's not a marketable color. I mean, repainting the space might be five, ten, twenty thousand dollars, depending on the size of the space. So, hey, listen, just before you leave, I want you to make sure you get you put it back to a cream color or whatever. That can also help a landlord save a lot of money on recouping costs.

Don Redhead 16:15

And it's like you just said, more marketable, right? You you have a higher chance of it getting backfilled faster. So it's it's a really partnership. If they can go in there and prime it to where when you show it, it's it's that much more desirable of a space. Therefore, more likely someone's going to move in faster. It becomes a win, you know, win for both organisms.

Make-Ready Standards And Marketability

Michael Carro 16:38

And that's always the goal. How do you create that win-win scenario? Um, and then the same thing, schedule walkthroughs. Uh, Donald schedule a walkthrough with the tenant. Um, hey, we know you're still here, but these are things you can do to help us make this space more marketable. Um, we can also address any issues up front. And, you know, I'll be honest with you, there have been times when I've gotten those calls and I'll it's been more on the business side. Hey, our restaurant's not doing well. And I may go to them and say, hey, listen, I know a restaurant consultant. Have you considered, you know, there's been some restaurants that their top line sales have been fantastic, but they're just not driving that money to the bottom line. Well, so the great thing is they've got the sales, but they're obviously not managing and operating the business in a way that they can figure out how to be profitable. So there have been times when I would suggest a a restaurant uh consultant that has gone in and really helped them improve their financials to a point where they maybe they don't have to leave at all. Maybe now they're happy because now they're making money. Um, they're having to make modifications to either their menu, their staffing, or whatever the uh processes are that maybe are not going well. Their food cost or portion control or even in their buying may not be right. So there's a lot of other factors that we can assist. We may not be an expert in the field, but there's a good chance we know people that are. What else? I don't know. So so at the at the end, once we get that uh uh uh that lease termination in place, then we have a sit-down. We have the lease termination and then we have the new lease. And then once those are both signed by the new tenant and the current tenant, then the landlord will have a simultaneous signing. So all things are executed simultaneously. Or whether it is a sub-lease agreement that is signed by the subtenant and the sub-landlord in this case, the current tenant who becomes the sub-landlord. Um, and then you also got to make sure that you are conscientious about the assignment language in the lease. Is the lease assignable? A lot of times the leases are not assignable without the landlord's permission. Or if you assign it, it doesn't mean that you're releasing uh the current tenant from their uh personal guarantee obligation. So there's a lot of little factors that come in that um a real estate expert or a property management expert can actually help you through. Uh those are a couple thoughts that I had in mind.

Consulting To Save A Struggling Tenant

Don Redhead 19:10

Yeah, and it was one that, you know, probably preach all the time where as we keep doing these, is having the right checklist, right, as you're going through all these, having the right documentation, because especially uh when you and you said the assignment made me think of a scenario where, yeah, we had a great relationship with one tenant, and some things were more verbal, right? We we were all on the same page, coup by the.

Michael Carro 19:36

I know which tenant you're talking about. Oh my god, our little nightmare. And and you know not a bad new, not a bad replacement tenant, but certainly not the person we signed up.

Don Redhead 19:47

And there was just things that there was a mutual understanding and historical behavior to reference that it just it got everything off on a bad start after that, and it just we couldn't recuperate.

Michael Carro 19:58

So it just uh they finished out their lease, and in this case, interestingly enough, the original tenant is coming back, so we're kind of excited about that. Yeah, that'll be nice. But we had to go through several years of of difficulty um and and not operating at a high, high level. So uh we're excited about getting back to basics, yeah.

Don Redhead 20:18

So it's just having everything documented, papered, written down, amendments done properly, everything will just because we do, you know, you do so many leases, and and and some of them, you know, five years. How are you gonna remember a conversation that you had five years ago about something random? Especially if the players change. Correct. Yeah. So just just get it in writing, document it. It's not because you don't trust somebody, it's just because most of the time you forget.

Michael Carro 20:44

Yeah. Guilty as charged. Well, that wraps up another restaurant. Oh, not the restaurant realty, that's a different podcast. That wraps up another Blue Dirt podcast. That's a wrap for this episode of Blue Dirt. We're here to help you build smarter, invest wiser, and create long-term value in commercial real estate. One solid foundation at a time. If you found today's insights useful, be sure to subscribe so you never miss an episode. And if you know somebody who could benefit from these discussions, share Blue Dirt with them. Got questions or topics you'd like us to cover? Reach out. We'd love to hear from you. Until next time, keep digging deep. Stay sharp, and remember, real value is built from the ground up. See you on the next episode.