Tenant Leasing Illustrated – October 2018 – There Is No Crying in Lease Surrenders

As we head into October and baseball season winds down, even I must admit that this has not exactly been a stellar year for my NY Mets.

The low point was probably July 31st when the Mets lost by three touchdowns to the Washington Nationals 25-4 for their worst loss in franchise history.

The game was so far gone that the Mets used infielder Jose Reyes to pitch an inning.

He gave up two home runs and eight runs but actually was an improvement over the starting pitcher and added comic relief when he hit the Nationals’ Ryan Zimmerman with a 54 mile per hour little league pitch causing Zimmerman to pretend to charge the mound.

It has actually become “a thing” this year in MLB baseball where teams in blowout situations use a position player to pitch in order to save their regular pitchers for another day.

Jason Gay of the Wall Street Journal suggested baseball use this trend to pick up lagging attendance by letting fans pitch when a game gets out of hand.

His plan was to run a raffle and then let the lucky fan pitch with no walks and one strike or foul ball being an out. Brilliant!

Now, even though there is no attendance problem with commercial leasing (frankly, we can scalp tickets to our negotiation sessions), there are times when raising a white flag in a lease negotiation might be in order.

In those situations, why not run a raffle and bring in a lefty from the bullpen; maybe the security guard or my aunt Blanche?

I know you are thinking that Mintz & Gold leasing attorneys (like the Mets) are Spartans, highly trained never to surrender and to return with their shield or upon it.

But sometimes the opportunity to surrender all or part of the space of a problem lease prior to the stated expiration date can be a positive thing for commercial tenants.

Lease terms sometimes provide an early termination right, but we are focusing on separate agreements to surrender the space.

A tenant may need an exit option for its leased space for positive reasons (has outgrown its space) or negative reasons (needs to downsize).

Subleasing is often an option but if the landlord is interested in taking back the space (e.g., if the market has picked up or the landlord could use the space for another tenant), termination of the lease is an even better option.

Follow the eleven suggestions below and you will not be knocked out of the box by your lease surrender agreement:

  • Agree in writing. Perhaps self-evident, but if you are terminating your lease early you need a written agreement with your landlord.
  • Define survival. Generally, surrender agreements provide that the lease will terminate on the date of early termination as if such date were the expiration date under the lease. This allows for certain obligations to survive (e.g., your landlord obligation to refund overpayments and your obligation to pay invoices sent in due course). Sometimes, the parties will agree to fully release each other from future obligations under the lease, which can work to your advantage but be certain that you are not leaving anything of value on the table.
  • Address restoration/removal. Many tenants are required to restore some or all of their premises to its prior condition and remove their personal property at the end of the lease term.
    • If your landlord needs your space for another tenant, you may be able to have this condition waived and deliver your premises “as is”. Alternatively, you may be able to pay your landlord to perform this obligation. In addition to the cost savings, this avoids disagreements as to whether you properly fulfilled your restoration obligations.
    • If you are unable to waive these obligations, you should limit your responsibility to removing specified items and repairing any damage, not restoring. You can also include a surrender protocol so that upon notice your landlord inspects and confirms in writing whether you have delivered as required under the lease (with a failure to respond being deemed acceptance of such surrender).
    • You should try to negotiate the right to leave some or all of your personal property in the space as evidenced by an exhibit that articulates the exact items that stay or go. It is not unusual for the cost of removal to exceed the value of the property, and it is also possible that the next tenant or subtenant can use such personal property.
  • Subleasing rights. You may need to surrender a portion of your space that is coveted by your landlord but remain obligated to hold onto the balance. In these situations, we have often been able to negotiate more lenient subleasing rights, e.g., more expeditious turnaround on consents, inability of your landlord to deny consent on economic grounds (since you remain liable for the rent), expedited arbitration to resolve disputes, etc.
  • Address defaults.
    • Limit any restriction on your right to terminate early to not being in “monetary or material non-monetary” default under your lease or surrender agreement and only after the expiration of applicable notice and grace periods. Even better, remove the default restriction altogether with respect to your lease if you can – after all, the lease is being terminated.
    • Many surrender agreements also provide that if you do not vacate the premises at the time required under the surrender agreement, your landlord can at its option terminate the surrender agreement and have you remain liable under the lease. Your landlord’s remedy should be to treat you as a holdover tenant paying liquidated damages, but you should not lose the ability to surrender for what may be a short-term inability to vacate.
  • Guaranty. Although any guaranty should by its terms terminate with your lease, you should confirm such termination in the surrender agreement (and if the surrender agreement is only a partial surrender and amends lease terms, your landlord will require a reaffirmation of the guaranty).
  • Security deposit. Any security deposit will likely be applied toward your obligations under your lease, but to the extent the security deposit or any portion thereof is being returned, this should be spelled out in the surrender agreement.
  • Stipulation of settlement. Often in New York, landlords (or sublandlords) that want to assure timely delivery of possession will require that tenants enter into a stipulation of settlement that is filed with the court and, in effect, acts as a landlord-tenant version of a confession of judgment. Really a topic for another newsletter, but you should confer with landlord-tenant counsel if entering into such a transaction.
  • Transfer Taxes. Keep in mind that in some jurisdictions transfer taxes may be due on the surrender of your lease and the parties’ respective responsibilities should be clearly indicated (even if just to file the appropriate forms). In New York, a transfer tax is only due if a tenant is being paid to vacate early, not if a tenant is making a payment in lieu of the remaining balance of rent.
  • Landlord access. Your landlord may require early access to some or all of your premises as part of the settlement (perhaps to prepare the space for an incoming tenant). If not already adequately addressed in your lease, you should carefully set forth the terms and conditions of such access so that it does not interfere with your business prior to termination.
  • Consent. You should confirm whether your lease is subject to a mortgage or ground lease (or related subordination non-disturbance and attornment agreement) that prohibits termination or amendment without the lender or ground lessor’s consent.

Many fans think that baseball and commercial leasing are best summed up by the great Yogi Berra when he said “It ain’t over till it’s over”. But as we have seen in both baseball and commercial leasing, there are ways to speed things up. Follow the suggestions above with respect to your lease surrender agreement and you will be covered if the relevant “Yogi-ism” becomes “It gets late early out here.”