Don't Describe Termination Right Tied to Specific Event as 'Ongoing'

Be careful how you describe the termination right you give a tenant. If you grant the tenant a right to terminate its lease in the event its business is sold, for example, make sure the tenant is required to exercise that right within a specific time period of the sale date. Consider what happened to an owner in a recent case that involved a similar termination right: A New Jersey appeals court determined that the tenant’s termination right was “ongoing” and could last for years—a nightmare for the owner of the premises.

There, a tenant negotiated a lease that granted it an ongoing right to terminate its obligations in the event of a sale or relocation of its business. Specifically, the lease stated that, “provided the Tenant is selling or moving the business, Tenant shall have the ongoing right to terminate its obligations…upon twelve (12) months’ written notice to Landlord.” The tenant sold its business, and the purchaser moved the company’s operations to a new location. After that had transpired, the tenant gave the owner 12 months’ notice for termination and moved out of the space when that period of time was up. The owner sued the tenant.

The owner claimed that the tenant’s termination right wasn’t ongoing; it had to be given during the pendency of the sale or relocation and would expire when either of those two events was complete. The tenant claimed that the use of the word “ongoing” in the lease gave it the right to terminate at any point during or even years after a sale or relocation. The owner sued the tenant. A trial court ruled in favor of the tenant. The owner appealed, but the decision was upheld.

The appeals court agreed that the provision permitted the tenant to terminate the lease years after the sale of its business, and didn’t limit its right to a specific window of time, because the right was described by the parties as “ongoing.” In fact, the termination right could be exercised at any point during the remaining life of the lease, said the appeals court. By giving 12 months’ notice in February 2009, the tenant was no longer obligated to pay rent after February 2010. The appeals court explained that the phrase “provided the Tenant is selling or moving the business” defines when the right to an early termination is triggered, not its duration; on the other hand, “ongoing” refers to an existing circumstance that will continue to persist into the future and it actually does define the duration of the right to early termination—that is, “ongoing” or until the lease ended on its own terms [Cortlandt Street Associates v. Elementis Specialties, Inc., December 2015].

“Obviously, the landlord should not have included the word ‘ongoing’ in the termination provision,” says Ohio attorney Abraham Lieberman. “But, in addition, the landlord could have insisted that language be added allowing the tenant to terminate only if it exercised that right within a certain specified number of days after a sale or relocation of the business,” he suggests.

Insider Source

Abraham Lieberman, Esq.: 5455 Detroit Rd., Sheffield Village, OH 44054; www.omdplaw.com.