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What is a Bailout Clause?

On Behalf of | May 23, 2022 | Real Estate

Whether you are a commercial landlord who is renting a property out to a tenant or a tenant who is renting or leasing property for their new business, you need to understand every single part of that lease agreement. It defines how this relationship will work and all of the options that each side has.

One clause that is often used is known as a bailout clause. What is this, and how does it work?

Defining sales numbers and projections

What this means, essentially, is that both parties will agree in advance that the business has to make a certain amount of revenue in the space. For instance, perhaps the commercial tenant will claim that they need to make at least a million dollars a year to simply be able to pay their bills. This is their baseline level for overall earning.

What the bailout clause does is that it says the tenant can break the lease if they don’t hit these numbers. After all, the tenant may not be able to afford to pay the lease for the full three-year or five-year term, and things could be problematic even if they’re on a one-year lease. They may also believe that the space just doesn’t work for the business or that the location is wrong, so they want to leave that location and find another space for the business. This is the type of flexibility that the bailout clause provides.

Setting up the right agreement

As you can see, it’s very important to have the right agreement in place when doing anything concerning commercial property. A bailout clause is just one type of clause that can help to alter this contract and change how it works. Be sure you know exactly what legal options you have.

Notice: We are providing this as general information only, and it should not be considered legal advice, which depends on the facts of each specific situation. Receipt of this content does not establish an attorney-client relationship.