LEASE AGREEMENT REFERENCE GUIDE: LARG 1020 TERMINATION RIGHTS FOR THE OFFICE TENANT $24.95
TERMINATION RIGHTS FOR THE OFFICE TENANT
This LARG focuses on termination rights for the office tenant--the progeny of office markets with high vacancy rates. The first section looks at how the landlord can engage in damage control if it is forced to agree to some sort of pro-tenant termination right. The second part considers the role of the lender concerning tenant termination rights in office building leases. The third section contains an example of an unconditional termination right in favor of the tenant. Finally, the Lease Clause Critique analyzes a heavily negotiated pro-tenant termination right that affects only part of the tenant's premises.
An Office Landlord's Survival Strategy for Pro-Tenant Termination Clauses
IBM's corporate nickname may be Big Blue, but some years ago it was the real estate market in Westchester County, New York singing the blues. IBM announced it was vacating 320,000 square feet of space in White Plains, 425,000 square feet in Purchase, and not less than 171,000 square feet of space in Tarrytown, N.Y. And that was only in Westchester County!
Corporate announcements of this sort tend to put office landlords in a cold sweat. They also make other corporate tenants think about how nice it would be to have pro-tenant termination clauses in their own office leases if the time ever comes for serious retrenchment efforts. And in markets with high vacancy rates, a large tenant can have the kind of leverage necessary to negotiate rights to walk during the term of the lease.
But what's an office landlord to do if a substantial tenant (both in terms of the size of the premises and in credit strength) insists upon a one-way pro-tenant termination option in the lease currently under negotiation? Then it's time for the landlord to use sharp negotiation in the business deal and good drafting in the paperwork. Critical areas of concern include the structure of the business deal concerning the termination right, its exercise mechanics, landlord reimbursements following termination, and obligations of the tenant to restore the premises. If the termination right affects only part of the premises, the configuration of the terminated space is also an important issue for the landlord, since it will have to market the space to a replacement tenant.
Structuring the Termination Right
If market conditions and tenant leverage make it clear that the tenant will wind up with some sort of termination right, the landlord should consider the following during the negotiation of the business deal:
The precise agreement concerning how the termination clause functions, when the right must be exercised by the tenant, the amount of notice due to the landlord, etc., are all critically important to the parties to the lease. The landlord should consider the following during the negotiation of the clause: