Termination on the Menu

Feigang Fei is not likely to make it in commercial real estate.

See, he is not much for boasting.

Mr. Fei runs AuntDai restaurant in Montreal where his menu is extremely honest.

About his “Mouth-watering Chicken dish he says: “We are not 100% satisfied with the flavor now” followed with a “PS: I am surprised that some customers still order this plate.”

Regarding his beef-and-potato stew which is based on a favorite dish when he was a student at Tianjin University, he explains that he is “not such a huge fan of the restaurant’s version, to be honest.”

But once an appreciative customer posted the menu on Twitter extolling Mr. Fei’s honesty, the tweet went viral and after that AuntDai could not keep up with the explosion in takeout orders.

“When I am asked about something I feel ashamed of, I will choose to avoid answering instead of lying,” says Mr. Fei in one of his now many interviews. “It’s good to be honest. No one should be boastful.”

Words that never have touched a landlord’s lips.

Maybe I can bring out that kind of Jim Carrey “Liar Liar” I cannot tell a lie mentality and use such straightforward honesty and reverse marketing for Mintz & Gold.

“The landlord’s draft of your lease just came in but it is well over a hundred pages single spaced so you cannot really expect us to read this nonsense.”

“Your landlord has all the leverage anyway and while I could read the lease and make comments, I do have Mets tickets tonight so…”

“Yes, you pay my exorbitant legal fees, but that doesn’t mean you can call me when I am not in the mood.”

“Law school? No, never went. Really cannot imagine that it is all that it is cracked up to be, but I wouldn’t know.”

Truth be told, sometimes a tenant needs to end its lease and, if lucky, it may even have negotiated a termination option in its lease.

A termination option allows a tenant to terminate its lease before the scheduled expiration date by providing the landlord with (usually a good amount of) notice and often by covering landlord’s unamortized costs and perhaps a bit extra.

Why is a termination option a valuable right?

A tenant entering into a long-term lease of ten or more years cannot know its future space needs and a termination option provides some flexibility and an alternative to subleasing and expansion rights.

The tenant may be doing well and outgrow its current space, or it may need to downsize during bad times.

Exercising (or threatening to exercise) an existing termination right can also allow the tenant to favorably renegotiate its lease terms.

We have talked in past newsletters about important points to address when negotiating a termination option, but today focus on implementing that option once it exists.

This is especially important during these COVID times when plenty of tenants would like to terminate or renegotiate their lease.

The danger is that landlords do not love tenant termination options and may resist implementation even if clearly set forth in a lease.

Follow the seven suggestions below and the exercise of your termination option will be deliciously straightforward (and that’s no lie):

  • Read your lease! Perhaps obvious, but first carefully read your termination option to understand your rights and the steps needed to exercise the option, as well as any potential pitfalls and ambiguities. For example, some leases limit the right to the original tenant and do not allow a successor entity to retain the termination right. Other leases limit the termination option to specific circumstances (e.g., your landlord cannot accommodate expansion or your relocation to another city).
  • Confirm the termination date. Your lease will provide for a specific time period for the termination, such as a one-time right to terminate as of a specific date or dates. Less likely but possible would be a right to terminate with notice after a minimum period (e.g., any time after the eighth lease year). You need to calendar this date since it will no doubt come with a time of the essence limitation.
  • Properly notify your landlord. You will be required to notify your landlord either on or before a specific date or a certain number of months before the termination date. Also pay attention to the type of notice (e.g., personal hand delivery, certified mail, etc.) and the parties and addresses required. Your landlord (and/or its address) and other required notice parties such as your landlord’s lender (and/or its address) may have changed so keep track of all notices regarding such changes.
  • Have termination payment ready. Nearly all termination options require a termination payment to cover the costs incurred by the landlord (e.g., unamortized broker fees, tenant improvement allowances, landlord construction costs, abatement amounts, etc.). There is often an interest factor and perhaps a few additional months of rent payments.
    • The termination payment may be required together with your termination notice. If your lease provides a calculation of this amount then you just have to gather the required funds. Otherwise, you will need to calculate the amount yourself.
    • Some leases will allow you to send your termination notice and then make the termination payment within an agreed upon period of time thereafter.
    • You may need to contact your landlord before sending the official termination notice to confirm your calculation (or request that your landlord provide such calculation). If so, give yourself plenty of time for the back and forth and potential that your landlord will not be thrilled and look to run out the clock.
    • Make sure you have everything needed to make the payment on time. For example, if payment must be made by federal wire transfer, you will need your landlord’s wire instructions.
  • Clear up defaults. Many leases require that the tenant not be in default in order to exercise the termination right. This prerequisite can include rent payments through the termination date, “additional rent” (basically any amount due under your lease) or even all (even minor) obligations. If your lease does not limit this obligation to monetary or material non-monetary defaults after expiration of notice and grace periods, be sure that there is nothing your landlord can use to try to deny you the right to exercise the option.
    • Make sure to meet all obligations after the termination option is exercised (e.g., payment of rent until termination, vacation of the premises broom clean and in the condition required under your lease, etc.).
    • Beware that some leases provide that if you fail to vacate by the modified expiration date your landlord will have the option to void your termination (rather than just treat you as a holdover tenant).
  • Remember any guaranty and security deposit. Confirm that the termination of your lease also results in the termination of any guaranties of your lease. Also request the return of your security deposit if your lease does not require that it be applied toward your termination obligations.
  • Dispute resolution. Be ready to use any dispute resolution mechanism provided for in your lease (for example, some leases will provide for expedited arbitration).

Mr. Fei has learned to be a little more politic. When explaining why he does not remove menu items that he dislikes, he said that he does not want to offend his chef, who has not read the online menu. I won’t tell if you won’t, but I can tell you that following the seven suggestions above will make for a more tasty exercise of your termination option.