When things go wrong, or even extremely well, a commercial tenant may need an exit strategy with respect to its lease. In addition to the common remedies of assignment and subletting, it can be extremely helpful to have a termination option.
In today’s newsletter we discuss termination options and provide ten suggestions to make them as clear and unambiguous as possible.
Mintz & Gold LLP
Can We Have a Termination Option for the Knicks?
With the onset of a new year, I feel that I should come clean and make a confession.
While I happily admit to being a New York Mets fan, the sad and shameful truth is that I am also a New York Knicks fan.
I know, I know, I have racked my brain to figure out what sins I am atoning for, but one is born into these things. You would never become a Knicks fan by choice any more than you would become a commercial leasing attorney by choice.
There is a certain charm to the Mets’ haplessness, but the Knicks are a disaster that you would not even wish upon a landlord.
In my defense, I first became a fan in the days of Willis Reed and, before he wore your grandma’s curtains for sports jackets and announced games with periphrastic loquaciousness, Walt Frazier (look those up Clyde!).
The Knicks have had 13 different coaches and only three winning seasons this century. They are the most poorly managed team in the NBA thanks to their owner, James Dolan, who last season traded their best player, Kristaps Porzingis (and just when I learned to spell his name), for a snickers bar and the draft rights to two Radio City Rockettes.
This year they already have one of the worst records in the NBA, have fired their latest coach and have petitioned the league for a mercy rule similar to the one used in youth sports (if one team is losing too badly, the game just stops and everyone has snack).
In early December, billionaire Steven Cohen agreed to purchase the Mets.
What’s the matter Steven, can’t handle a real challenge and buy the Knicks?!
Actually, Jason Gay of the Wall Street Journal recently admonished Michael Bloomberg for running for President to save the world when he instead could do something truly merciful for humankind and buy the Knicks.
After all, anybody can (and it seems everybody has) run for President and Mr. Gay argues that while it “is simply loathsome New York City narcissism, arguing that saving the city’s basketball team would be a bigger deal than saving the planet…”, but then again… “have you watched the Knicks lately?”
In commercial leasing, tenants too can need a mercy rule and sometimes there is a way out (with snack optional).
This is an early termination right which allows the tenant to terminate its lease before the scheduled expiration date upon providing the landlord with a good deal of notice and usually covering landlord’s unamortized costs and perhaps a bit extra.
Recently we were involved in an unusual transaction (and no, wise guy, the unusual part was not that the tenant was reckless enough to retain us).
A retail tenant had agreed to waive a number of customary rights, including its assignment and subletting rights (other than as part of a merger or sale) in exchange for a right to terminate every four years during a 15-year term without significant penalty.
The tenant’s view was that he would know in two or three years if his business was going to make it and would gladly trade away other customary rights in order to have the flexibility to walk away.
We would definitely not recommend this approach to everyone since four years can be a long time and subleasing provides a very useful exit strategy, but it worked for this tenant and, in that instance, he needed as clear and clean a termination provision as possible.
Of course, any tenant with a right of termination requires that the option be clear and clean and without ambiguity.
Make sure your lease termination provision is more Lakers than Knicks with the following ten suggestions:
- No default. You should be able to terminate whether or not you are in default under your lease. If removing the condition that there be no default is not possible, then you should not be prevented from terminating as long as you make any rent payments required through the termination date (preventing your landlord from using a minor default to nullify your termination right). You should make sure that such payments are limited to fixed rent and clear quantifiable amounts and not “additional rent” which normally means any amount that the landlord believes it is entitled to under the lease. At a minimum, this requirement should be limited to monetary or material non-monetary defaults after expiration of notice and grace periods.
- Clearly set the termination date. You will likely have a one-time right to terminate as of a specific date (possibly one or more dates). Sometimes you may be able to negotiate the ability to terminate with notice after a minimum period (e.g. any time after the sixth lease year).
- Clearly set the required notice. The timing of any required notice (e.g., on or before a specific date or certain months before the termination date) should be clearly stated as well as the type of notice (e.g., certified mail) and the parties and addresses required. Remember also that your landlord (and/or its address) may have changed so keep track of change of address notices.
- Identify the termination payment. Although our client above negotiated an early termination right without any payment, this is unusual. This payment will generally cover the costs incurred by your landlord (such as broker fees, tenant improvement allowances, landlord construction costs, abatement amounts), often with an interest factor, and with rent payment for an additional number of months. Often the termination payment must be paid together with your notice exercising the option, so it is best to calculate the amount up front during lease negotiations. If that is not possible, you will need to specify how such termination payment can be calculated in the future to avoid a problem landlord who refuses to cooperate. It is best if you are allowed to send your notice terminating the lease and then make the termination payment within an agreed upon period of time after calculation, but you can also require that your landlord first provide its calculation, failing which your notice can be sent without the termination payment and such payment made after invoicing. Try to also have any disputes regarding the amount determined by expedited arbitration.
- Address survival. Your lease should end on the early termination date as if such date were the expiration date under the lease. This allows for certain obligations to survive (such as your obligations to make payments and vacate the premises, and your landlord’s obligations to return your security and refund overpayments). Sometimes, you and your landlord may agree to fully release each other from future obligations under the lease, but this is less common and be careful you are not leaving anything valuable behind.
- Cover successors. Be sure that a successor entity (e.g., by merger, reorganization or other corporate transaction) and, if possible, an unaffiliated assignee, retains the termination right.
- Consider a possible subsequent default. Many termination provisions provide that if you are not able to vacate on time your landlord can void the termination option. Your landlord’s remedy should be to treat you as a holdover tenant paying liquidated damages, but you should not lose the ability to terminate.
- Guaranty. Although any guaranty should by its terms terminate with your lease, you should confirm such termination.
- Security deposit. Your termination option may require that your security deposit be applied toward your termination obligations, but otherwise clearly state that your security deposit is being returned.
- Transfer Taxes. Keep in mind that in some jurisdictions transfer taxes may be due on the surrender of your lease (in NY, only if the tenant is being paid to terminate early). The respective responsibilities of you and your landlord should be clearly indicated.
I would compare the feeling a Knicks fan gets when watching a Knicks game these days to standing outside in the middle of winter and having someone pour a bucket of cold water over your head. Similar to my reaction when reading a landlord’s first draft of most commercial leases. At least I am consistent in my endeavors. Follow the ten suggestions above and ensure that your termination provision will be a slam dunk.