One of the biggest issues in all of lease negotiations are termination options. Tenants want them, landlords fear them, and brokers don’t want to have anything at all to do with them. The reasons why are based in common sense.
• Tenants want the option to terminate their lease agreement at any time and are willing to pay a lot of money to exercise the option. Still, it’s not something that’s commonly agreed to by landlords, and commercial real estate agents resist them.
• Landlords view a lease termination option in a wholly negative light and are frequently resistant to negotiate this into the terms, even if it results in a deal killer. Often a landlord is between a rock and a hard place. The landlord’s lender gets to approve any substantial lease, and if there is a provision that will affect the landlord’s ability to pay its mortgage, the lender will likely not approve the lease.
• Traditional commercial real estate agents see negotiating the ability for a tenant to terminate a lease agreement as counterproductive to their personal goals of earning a living. Working a termination option into a lease can have a significant negative impact on the commission of a broker, as it can impact the fees they earn by as much as half.
So what does a tenant have to do in order to gain the option to terminate their lease agreement?
- The tenant can pay for their own improvements and for their broker’s fee. After all, if the tenant can terminate the lease before the landlord can break even, the landlord would be making a very bad deal.
- The tenant can offer to give ample notice of their intent to terminate, which will allow the landlord to find a replacement tenant. Common termination notices provisions range from 6 to 12 months. However, they can be up to 18 months. We have also seen where the option period opens and closes during a short period of time, a trick that the landlord will use to catch a sleepy lease administrator off guard.
- The tenant can offer to pay the landlord’s unamortized expense of doing the deal. In this instance, the landlord might send a check to the landlord at the time that they exercise their termination right in the amount of the sum of the unamortized brokerage commissions and tenant improvement allowance. Sometimes tenants will include any free rent that they may have received in the calculation of the unamortized deal costs.
- The tenant can pay a fee that is equal to some number of months of rent. This is typically designed to reimburse the landlord while the space is empty.
- A combination of some, or all of, the above. In landlord-friendly markets, getting a termination is tough. The tenant may agree to pay the landlord for its unamortized deal costs, provide 12 months advance notice (but only during the week prior to), pay six months of rent, reimburse the landlord for the free rent the tenant received and the right completely goes away if the tenant is ever in default (or more than 1 day late with its rent).
- If you are in dire straights, look at the tenant default, bankruptcy and mitigation sections of your lease – then talk to a good attorney. Each different, but you may find that your state will force the landlord to mitigate the lease burden if you can’t pay the rent.
- Short of hoping against all hope, tenants have to align themselves with a commercial real estate brokerage that pays their agents based on performance. Although finding such an organization can be on a par with finding the Holy Grail or hunting down Bigfoot, there are tenants who have been able to accomplish this task. As a result, they’ve emerged from negotiations with a renewed perspective on what the relationship between tenant, landlord, and commercial real estate broker can be about, and what they can result in: a mutually beneficial solution for everyone involved.