Make Tenant Pay Termination Fee as Early as Possible

If you agree to give a tenant a termination option, you'll probably require the tenant to exercise the option by sending you a written termination notice and paying a termination fee. But if your lease is like many we've seen, it may require the tenant to send you a termination notice many months before the termination date, but let the tenant wait to send you the termination fee until right before the termination date.

There's a problem with this procedure. After getting the tenant's termination notice, you may spend time and money finding a new tenant, but then never get the existing tenant's termination fee. Worse yet, the existing tenant might claim that because it didn't pay the termination fee, its termination option wasn't fully exercised. So it doesn't have to move out of its space. Now you've got to battle the existing tenant in court—and tell your new tenant that you've got no place to put it.

To prevent a tenant from trying to back out of its termination option this way, New Jersey attorney Marc L. Ripp and New York attorney Stuart J. Frank recommend that you make the tenant pay the termination fee as early as possible. Here's a hardball approach and a compromise approach you can use when negotiating your lease. CLLI0025

Hardball Approach: Tenant Pays Full Fee with Termination Notice

Start off with this hardball approach: Require the tenant to pay the termination fee when it exercises the termination option—that is, when it sends you its written termination notice, say Frank and Ripp. That way you get the termination fee as early as possible and know that the termination option is fully exercised. If the fee doesn't accompany the notice, the notice is no good, says Frank. Also require the tenant to give you a certified or cashier's check drawn on a local bank, says Ripp.

To use this hardball approach, add the following language to your lease's termination option clause (you'll have to define “Termination Notice” elsewhere in the lease):

Model Lease Language

In order for the Termination Notice to be effective, it must be accompanied with an unendorsed certified check or bank cashier's check drawn on a [insert name of state, e.g., New Jersey] banking institution payable to the direct order of Landlord in the amount of $[insert #].

Compromise Approach: Tenant Pays Partial Fee with Termination Notice

A tenant may balk at giving you the termination fee so far in advance of the lease's termination date, notes Frank. It's likely to demand that it pay the fee as late as possible. In response, try this compromise, says Frank: Agree that half the termination fee must be paid with the termination notice. The other half must be paid at least 30 days before the date the lease terminates. This partial payment should give the tenant an incentive not to try to back out of the termination option.

As an added protection, say in the lease that if the tenant doesn't pay either the first or second half of the termination fee, you've got the right to cancel the termination, keep any installment of the termination fee paid, and keep the lease in force, in addition to any other rights the lease and law give you, says Ripp. Also say that if you decide not to cancel the termination, the tenant remains obligated to pay the balance of the termination fee, even after the lease's termination, he adds.

To use this compromise approach, add the following language to your lease's termination option clause:

Model Lease Language

No termination by Tenant under this Clause [insert #] shall be deemed effective until Landlord has received a non-refundable termination fee in the amount of $[insert #] (“Termination Fee”), payable only in cash or certified funds. Tenant shall pay [insert #, e.g., 50] percent of the Termination Fee with the Termination Notice and the remainder of the Termination Fee at least [insert #, e.g., 30] days before the effective date of the termination of this Lease. If Tenant fails to pay either or both installments when due, then Landlord, in its sole option and in addition to all other rights and remedies at law, in equity, or under this Lease, may nullify the exercise of the Termination Option and retain any installments of the Termination Fee paid. However, Tenant agrees that if Landlord does not nullify the exercise of the Termination Option, Tenant's obligation to pay the entire Termination Fee shall survive the early termination of this Lease.

CLLI Sources

Stuart J. Frank, Esq.: Special Counsel, Hinman, Howard & Kattell, LLP, 224 Harrison St., Ste. 500, Syracuse, NY 13202; (315) 473-9414.

Marc L. Ripp, Esq.: Counsel, The Gale Co., LLC, 100 Campus Dr., Ste. 200, Florham Park, NJ 07932; (973) 301-9500, MRipp@thegalecompany.com.