LEASE AGREEMENT REFERENCE GUIDE 350: STRATEGIES FOR RETAIL LEASE TERMINATIONS $24.95
Negotiating The Retail Lease Termination Agreement
This LARG focuses upon the retail lease termination agreement. In addition to the following article analyzing the business factors of negotiating such termination agreement, the Lease Clause Critique covers an entire pro-tenant termination agreement with comment.
There are a number of reasons why retail tenants, and in particular department stores, don't remain in possession for the entire term of their leases. They include:
Negotiating The Termination Agreement
Obviously, the tenant will try to assign or sublease the space if it is possible. The tenant is particularly motivated to do this when the rental under the lease is below market, and the tenant stands to make a profit by assignment or sublease. As a practical matter, transferring the lease to a third party is only possible when the location has real estate value from a retailer's standpoint. In many cases, the very reason the retailer wants to terminate the lease and discontinue operations in the location is due to real estate weakness.
When a tenant is locked into a long term lease, possibly with operating covenants, negotiating an agreement to terminate the lease usually is an exercise in "checkbook diplomacy." This means that the landlord and tenant enter into negotiations to terminate the lease in consideration of a cash payment from the tenant to the landlord. Depending upon the amount of the termination payment, the approach can make genuine business sense for the tenant.
The amount of the termination payment may be small compared to the annual operating losses the tenant sustains by continued operation. Further, if the tenant has resolved to close an entire geographical division (e.g., all of its stores in the southern California area), he simply cannot afford to operate one store in that geographical area. Economics of operation, distribution, and advertising dictate that all stores must be closed in the region.