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Lease Strategies

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This LARG looks at what happens when a landlord or tenant wants out of a long term lease early. Absent bankruptcy, the parties get out of leases the same way they get into them—through negotiations. As is customary in commercial dealings, the main sticking points usually involve payments of cash—how much and to whom? The Lease Clause Critique contains extended excerpts and comment from two termination agreements—one for office space and one for a retail property.

Number of Single Spaced Pages: 12




Drafting Office and Retail Termination Agreements


Cooking Up An Equitable Lease Termination Agreement

Despite the best laid plans of commercial landlords and tenants, some long term leases just never make it to their expiration dates. One party or the other wants out of the deal before the end of the term. If the party wanting out is the tenant, it will generally try to assign or sublease the space if possible. The tenant is particularly motivated to do this when the rent under the lease is below market. In such cases, the tenant may be able to make a profit by assignment or sublease, or at a minimum get out of the lease even, without losing any of its financial feathers. If an assignment or sublease isn’t feasible, then usually negotiations for a termination agreement start up between the parties.

How Much Cash?

The most important points in the termination agreement will likely be the economic ones. If the tenant wants out of a lease early, it will probably have to pay cash to the landlord for that right. But how should this "termination payment" be calculated?

As a starting point, most landlords and tenants look at the amount of rent and other charges the tenant would have to pay if it remained in possession until the lease’s expiration date, or until the tenant's first express termination date contained in the lease. Many such negotiations wind up "splitting the difference" between the landlord and the tenant, i.e., the amount of the termination payment to the landlord is about half of the total remaining financial obligation of the tenant. But that is only the starting point for negotiations. The bottom line will ultimately be determined by how much the tenant wants out and how much the landlord will be hurt by the early termination.

The Landlord Wants Out?

In some cases, the landlord wants to terminate the lease, and get the space back. This can happen when:

  • the tenant is in arrears in the rent, or is causing problems with other tenants in the complex, and the landlord just wants to collect back rent and get rid of the tenant without initiating unlawful detainer or default proceedings;
  • the landlord needs the space to make a larger deal with another tenant, and does not have expeditious relocation rights in the lease to move the tenant to other space; or
  • the landlord is anxious to redevelop or renovate the complex, and the tenant’s presence is frustrating or blocking the process.

Obviously, when it is the landlord who wants to terminate early, it will generally be the tenant who benefits from "termination payments" or other goodies such as relocation cash or preferential rent or lease terms on new space provided by the landlord. The amount of such payments will be determined by the tenant’s leverage in the deal, and by its negotiating acumen.


End of Excerpt