Letting a Tenant Buy Its Way Out of a Lease

The pandemic has illustrated the need for landlords and tenants to be flexible and work together to find solutions to leases that have become disadvantageous. One approach is to enter into a buy-out agreement allowing the tenant to end the lease early in exchange for an agreed-to sum of money.

The central issue in buy-out negotiations is how much the tenant should pay for the right to end the lease before the term expires. The stronger the market, the lower the buy-out price. Explanation: It’s easier to replace a tenant, often at a higher rent, when the market is strong. Replacing tenants is more challenging in a soft market. Other key factors influencing the buy-out price include:

• How much time is left on the lease;
• The tenant’s remaining rent obligations, for example, whether the lease provides for significant rent increases in the future;
• The value of any improvements that the tenant or landlord made to the space, such as whether tenant improvements are useable by future tenants;
• The unamortized portion of future commissions;
• The desirability of the tenant’s space; and
• The tenant’s financial stability.

Unfortunately, buy-out negotiations typically focus so intensely on the amount of money the tenant must pay to end the lease early that the nitty-gritty legal details get overlooked. While a negotiated buy-out agreement is one of the most fair and effective ways to end a disadvantageous lease, there are also a lot of moving parts from the legal perspective.

For 11 legal protections to include in your buy-out agreement, as well as a Model Agreement, see “How to Negotiate and Structure a Lease Buy-Out,” available to premium subscribers here.