Protect Yourself in Event of Tenant’s Early Termination

In some cases, either you or the tenant—or both parties—will want to end the tenant’s lease early. This isn’t necessarily a bad thing. The tenant may be having a hard time making ends meet and want to downsize, relocate to cheaper space, or go out of business, giving you the opportunity to re-rent the space to a more lucrative tenant—especially if you plan on collecting percentage rent that you’ve been missing out on with the current tenant’s lagging sales. Or you may plan major alterations to the building or center and want to change your tenant synergy.

Regardless of the reason, if you and the tenant agree to terminate the lease early, signing what’s known as a lease termination agreement is a must. This agreement should include specific information. Without a carefully drafted termination agreement, you’ll be left open to claims from third parties and other expensive or messy outcomes, rather than the opportunity to get a great new tenant. To plug this loophole, at the very least, the termination agreement should set the new lease termination date, list your and the tenant’s remaining rights and obligations, and give you key protections. Consider taking it a step further and including the following items to make your termination agreement airtight.

Item #1: Get Assurance that No Other Party Holds Lease Interest

Have the tenant state in the agreement that it’s the sole owner of the tenant’s interest in the lease and that it hasn’t assigned or transferred the lease, its lease interest, or any claims to a third party. This is necessary because it’s not unusual for a tenant to assign its lease without giving notice, even if the lease requires notice and your consent.

If a third party bought the tenant’s business and name without your knowledge, that party could argue that the agreement is meaningless. Although another party could have an interest in the lease despite the tenant’s statement, you would at least be in a stronger arguing position. To do this, ask your attorney about using the following language:

Model Language

Tenant represents and warrants that Tenant is the sole owner of the Tenant’s interest in the Lease; it has not made any assignment, sublease, transfer, encumbrance, conveyance, or other disposition of:

     a. Any interest it has in the Lease; or

     b. Any claim, demand, obligation, liability, action, or cause of action arising under or relating to the terms of the Lease, to any person or entity.

Item #2: Require Tenant to Pay Termination Fee

If the tenant asks to terminate the lease, consider charging the tenant a termination fee. This will protect you from the costs and losses of the early termination.

How should you calculate the termination fee? Add up: (1) the fees you’ll pay your attorney to draft and negotiate the lease termination agreement; (2) any late fees or interest charges the tenant may owe; (3) the costs of preparing the space for re-letting (if the tenant doesn’t deliver it in the condition required by the lease); and (4) your unamortized costs of leasing the space to the tenant in the first place (such as brokers' commissions). (Ask your attorney about whether you’re entitled to your expenditures for tenant improvements. That’s sometimes, but not always, the case.)

Model Language

On or before [insert date], Tenant will pay Landlord $[insert #] by [insert form of payment].

Remember to also ask your accountant about the tax consequences of accepting a termination fee from the tenant and how best to structure the payment of that fee. And because you and the tenant will typically sign a lease termination agreement weeks or months before the lease will terminate, try to get the tenant to pay the termination fee—or at least part of it—on the day the agreement is signed, rather than wait until the termination date.

Item #3: Set Termination Date

Set the new lease termination date. But make the termination conditional on the tenant’s moving out of its space and paying the termination fee by that date (or whatever other date or dates you’ve set for payment in the lease). Plus, say in the lease termination agreement that if the tenant doesn’t meet those conditions, you’ve got the right to declare an “event of default” and resort to your remedies under the lease—including the right to evict the tenant from the space.

You’re better off using your lease remedies than facing the prolonged lawsuit that would probably result from suing under the lease termination agreement. Also, if you sue the tenant under the lease termination agreement, you might be limited to recovering only rent through the date that the tenant moves out. But if you sue under the lease, you might get the tenant to pay rent for the balance of the original lease term.

Model Language

Landlord and Tenant agree that the Lease shall be terminated effective as of [insert time] on [insert date] (“Termination Date”); provided that:

(i) the conditions specified in Paragraphs [insert #] have been met, and

(ii) Tenant and all subtenants or occupants have vacated the Premises.

If such conditions have not been met or Tenant or any subtenants or occupants have failed to vacate the Premises on the Termination Date, Landlord may declare an incurable Event of Default and pursue its remedies under Clause [insert #] of the Lease.

Item #4: Ensure Worry-Free End of Obligations

Make sure that the tenant is responsible for all of its lease obligations up to the termination date, including the payment of all fees and rent due. To avoid any confusion or dispute, add the exact time—for example, 11:59 p.m. of the last day—that the lease will terminate. After the termination date, only those lease obligations that you’ve agreed will survive (or must survive according to law) will remain in effect.

Model Language

From and after the Termination Date, the Lease will be of no further force and effect, and Landlord and Tenant shall be released from any further obligations under the Lease, except for those obligations that accrued prior to the Termination Date and those obligations and indemnifications that survive the Lease expiration or earlier termination according to the Lease or by law.

You should also require that the agreement be kept confidential. Otherwise, other tenants in your building or center may find out about it and think that they too can negotiate an early exit to their leases. You shouldn’t have a problem getting the tenant to agree to this, especially if the tenant asked for the termination in the first place. But remember that if the lease (or a memorandum of lease) was recorded in a government office, you may need to record the lease termination agreement there, as well.

Model Language

Landlord and Tenant acknowledge that this Agreement contains confidential information. Accordingly, Landlord and Tenant agree that they shall keep this Agreement confidential and shall not disclose it to anyone other than the following:

     (i) Attorneys for Landlord or Tenant;

     (ii) Accountants for Landlord or Tenant;

     (iii) Lender or mortgagee of Landlord; and

     (iv) Any other person, whom Landlord determines, is reasonably necessary or required to review these contents.

Item #5: Require Tenant to Pay Rent Until Lease Ends

Have the tenant agree that it will pay all of its minimum rent, additional rent, and any other charges due under the lease (for instance, a late fee) up to and including the termination date. Also, have it agree to perform its other lease obligations (such as operating continuously, if it’s a retail tenant) until that time. Otherwise, the tenant may argue that these obligations stop once you sign the lease termination agreement, which might be weeks or months before the termination date.

As further protection, also say in the lease that if the tenant misses any payments, you can opt not to terminate the lease. Instead, you can choose to treat the nonpayment as an event of default and resort to any of your lease remedies—for example, suing the tenant for damages.

Model Language

Tenant will pay Landlord the Monthly Minimum Rent, Additional Rent, and any other charges due under the Lease up to and including the Termination Date, in accordance with the Lease. If Tenant fails to do so, at Landlord’s election, the Lease will not terminate pursuant to this Agreement, and Landlord may declare an incurable Event of Default and pursue its remedies under Clause [insert #] of the Lease.

Item #6: Keep Right to Your Default Remedies After Agreement Is Signed

Clarify in the agreement that if the tenant violates the lease after the termination agreement is signed but before the termination date, you still can resort to your lease remedies. That way, if the tenant assigns the lease without your required consent, you can block the assignment or sue the tenant for damages if the lease allows it.

Model Language

If Tenant is in breach of the Lease prior to the Termination Date, Landlord may pursue its remedies under Clause [insert #] of the Lease or at law or in equity.

Item #7: Require Indemnification by Tenant

For added protection, get the tenant to agree that any provision in the lease indemnifying you will remain in effect after the lease is terminated. That will keep the tenant obligated to protect you financially and legally if you get sued because of something that happened while the tenant was in the space.

Model Language

Tenant agrees that the indemnification provisions of clause [insert #] of the Lease shall survive the termination of the Lease pursuant to this Agreement.

Item #8: Terminate Special Rights and Options

You may have given the tenant special rights or options in the lease—for example, a right of first refusal or first offer. If you did that, it would be a good idea, if possible, to terminate those special rights and options on the date the lease termination agreement is signed. You don’t want the tenant to exercise any of these rights in the 11th hour before the lease terminates. Plus, if the termination is at the tenant’s request, it’s probably no longer the type of tenant that deserves special perks.

Model Language

Effective as of the date of the execution of this Agreement, all rights and options granted to Tenant under Clauses [insert #] shall immediately become null and void and of no further effect.

Item #9: Get Space Back in Condition Required by Lease

Say in the lease termination agreement that the tenant must return the space to you in the condition required by the lease. So, for instance, if the lease requires the tenant to return the space in the same condition as when it first got the space, the tenant must still satisfy that requirement. If the tenant claims that it won’t have enough time to restore the space to its original condition, consider postponing the termination date.

Model Language

Tenant will surrender possession of the Premises to Landlord pursuant to Clause [insert #] of the Lease.

Item #10: Get Right to Keep Abandoned Property

Say that if the tenant leaves behind furniture, fixtures, and equipment, you have the right to keep those items. This gives you the right to remove them, sell them, and pocket the money. It also prevents the tenant from returning after the termination date and demanding that you hand over those items.

But check with your attorney about whether your local law permits you to keep the tenant’s abandoned property or to require the tenant to remove the items at its sole cost. The latter may be a better alternative because you may not want to keep—or spend time and money disposing of—abandoned property in the space.

Model Language

Any failure by Tenant to remove all of its personal property, furniture, trade fixtures, and equipment on or before the Termination Date, will be conclusively deemed an abandonment by Tenant of all such property and this Agreement will be considered a bill of sale conveying property to Landlord. Tenant agrees that, at Landlord’s request, it shall remove the abandoned property, at Tenant’s sole cost and expense.