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Lease Strategies

Product Overview

This LARG contains the following items:

An Office Landlord's Survival Strategy for Pro-Tenant Termination Clauses, Tenant Termination Clauses and Office Building Loans in the 90's, The Office Tenant's Unconditional Termination Clause, and the Lease Clause Critique: Pro-Tenant Termination Rights for a Portion of the Premises.

Number of Single Spaced Pages: 12





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:

  • Can the termination right be limited to only a portion of the premises? Large tenants take large spaces, and it may be possible to limit the area subject to tenant termination, and still give the tenant a feeling that it can downsize if its particular industry hits the skids.
  • Can the landlord negotiate a large cash payment from the tenant if it decides to exercise its right to walk? Such a termination payment can ease the pain for the landlord if the tenant pulls out.
  • Can the landlord negotiate conditions which must be satisfied before the tenant can exercise its option to terminate the office lease (e.g., three consecutive quarters of financial losses by the tenant prior to exercise, corporate decision to close the subsidiary that signed the lease, no termination to consolidate corporate operations in another building within 20 miles from the premises, etc.)?
  • Can the landlord push the timing of the tenant's right to terminate to the outer limits of the initial term of the lease?

Exercise Mechanics

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:

  • Does the clause expressly provide that the termination will not be effective unless it is exercised strictly in accordance with the requirements of the clause?
  • Does the termination right affect the entire premises, or only a portion of the tenant's space?
    If the right pertains to part of the premises, is the area subject to the right clearly shown in an exhibit to the lease?
  • Does the clause contain an exercise "window" (for example, during the fifth year of the lease term) during which the tenant must exercise the termination right, if at all?
  • Does the clause provide that the tenant cannot exercise its termination rights if it is in default of the lease?
  • Does the language of the termination clause provide that the right will lapse and be of no further force or effect if the right is not exercised during the "window" set forth in the clause?
  • Must the tenant exercise the termination in writing?
  • How much notice must the tenant give the landlord prior to the effective date of the termination?
  • Is the notice period adequate (e.g., one year) to permit the landlord to attract a replacement tenant for the space?


End of Excerpt