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Wins & Insights

Tenant Leasing Illustrated – July 2018 – The Greatest (Termination) Show On Earth

I have vivid memories of going to the Ringling Bros. and Barnum & Bailey Circus as a young boy.

Three rings, acrobats and clowns, flashing lights and of course elephants, lions and tigers.

At what point in the evolutionary cycle did we switch from thinking we need to run away from wild animals so we do not get stomped or eaten to “hmmm, maybe instead I can have them stand on a stool, ride a bicycle or jump through a hoop”?

But, alas, the original “Greatest Show on Earth” has terminated and is no more (unless you include my proofreading a 140 page lease in that category).

The Wall Street Journal recently followed up on the new careers of some circus performers.

An elephant handler now serves diners at a wine bar and exclaims that the pachyderms listened better and were not as messy. True.

A human cannonball becomes a leasing attorney but wants to go back to the relative calm as a projectile. Maybe not quite as true.

And, yes, a clown is running for Congress. Sorry, that’s just too easy, but true.

In commercial leasing, early termination can be a plus for tenants.

A tenant entering into a long term lease of ten or fifteen years does not have a crystal ball to assess its future space needs and there are countless reasons why a termination right can prove beneficial.

The tenant may outgrow its current space and prefer to end its obligation rather than become a sublandlord.

Alternatively, the tenant’s business may shrink and it may need to downsize.

The tenant might even need to relocate to another city.

In addition to rights to sublease and expansion options, a termination option provides a tenant some down the road space needs flexibility.

Of course, nothing is free in leasing and landlords will expect at a minimum to be repaid its unamortized costs incurred with respect to the lease.

In addition, most landlords will look for plenty of notice and an additional payment.

Landlords naturally do not like the high wire act of tenant termination options and, even if agreed upon in a lease, may resist implementation.

We have one client who came to us after months of battle with a landlord who would not specify the termination payment required to be made with the tenant’s notice of termination and our intervention was needed to convince the landlord to stop clowning around.

Follow the nine suggestions below and you can be the Ring Master of your own termination clause:

  • Specify the accelerated termination date. Some leases allow a tenant flexibility in terminating (e.g. upon six months’ notice any time after the fourth lease year), but most will allow only a one-time right to terminate as of a specific date (e.g., on the fifth anniversary of the commencement date).
  • Address notice. Your lease should be clear as to when you have to provide your landlord with written notice, usually on or before a specific date or an agreed upon number of months before the accelerated termination date. Also address the type of notice (e.g., certified mail, overnight courier, etc.) and parties and addresses required.
    • Make sure you have everything you need to send the notice, including the amount of the termination payment (see following two bullet points), wire instructions if necessary, etc.
    • Be aware of revisions in your landlord’s notice requirements which may have changed (for example, after a sale or refinancing of the building).
  • Specify the termination payment amount. Clearly indicate the unamortized costs included in the termination payment, such as broker fees, tenant improvement allowances, landlord construction costs, abatement amounts and perhaps even attorneys’ fees, and any interest factor thrown in. You will also need to negotiate any additional amount required by your landlord (often a set dollar amount or the lease rental for a specified number of months).
  • Indicate the calculation. Most leases require that the termination payment be paid together with the tenant’s notice exercising the option. Our strong preference is to calculate the termination payment up front with the landlord during lease negotiations. Most of the variables can be addressed and you will know exactly what needs to be paid with your notice. If it is not possible to calculate the termination payment at the time of lease negotiation you will need to address how such termination payment can be calculated in the future to avoid the recalcitrant landlord problems faced by our client referenced above.
    • Of course, the easiest method from the tenant’s point of view is for your lease to allow you to send your notice terminating the lease and then make the termination payment within an agreed upon period of time after calculation and invoicing of the termination payment by the landlord.
    • Another solution is to require that your landlord provide its calculation within an agreed upon time after your written request, failing which your notice can be sent without the termination payment and such payment made after invoicing.
    • You can address disputes by being allowed to make the payment subject to final determination by expedited arbitration.
  • Do not restrict option to original tenant. While it is understandable that a subtenant should not retain this right, you should be sure that a successor entity (e.g., by merger, reorganization or other corporate transaction) retains the termination right.
  • No default. Often it will be a prerequisite that you not be in default under your lease. You may want to delete this requirement but if not it should be limited to monetary or material non-monetary defaults or at a minimum defaults after expiration of notice and grace periods.
  • Address failure to vacate. Some leases provide that if you fail to vacate by the modified expiration date your landlord will have the option to void your termination. Instead, provide that such failure will result in a holdover in accordance with your lease.
  • Reasons for termination. Generally, the termination right will be completely in your discretion, although sometimes the option may be limited to specified circumstances, such as your leaving the applicable metropolitan area or if your landlord is unable to accommodate your additional growth within its project.
  • Cover obligations after termination. This means both yours (e.g., payment of rent until termination, vacation of the premises broom clean and in the condition required under your lease) and your landlord’s (e.g., return of your security deposit and refund of any overpayments). You should also be sure not to inadvertently waive termination rights in estoppels or nondisturbance agreements which often include boilerplate representations that no such termination options exist.

P.T. Barnum is reputed to have said “there’s a sucker born every minute.” And no, old P.T. was not talking about this newsletter when he said that. But make sure he is not talking about your lease termination provision by following the nine suggestions above.