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By Mickey Maher
August 2, 2024
In the current economic climate, distressed tenants increasingly are approaching landlords about terminating their leases early – especially in retail and office settings. In a variation of the theme, a tenant may look to surrender a portion of its premises before its lease expires in consideration for reduced rent. No tenant relishes broaching the subject with its landlord, nor does the tenant’s landlord enjoy the experience.
Tenant, before approaching your landlord, review pertinent provisions of your lease – those addressing the condition in which you are required to leave the premises, including your rights and obligations concerning removing alterations, furniture, trade fixtures and equipment, as well as your liabilities that survive termination, such as indemnity provisions. Initiate the conversation with your landlord (or the property manager) and be prepared to deliver your written proposal at the end of the conversation.
Landlord, after the tenant has approached you, resist the temptation to respond on the spot or off the cuff. Before responding, study the tenant’s proposal in light of the pertinent provisions of the lease – the same ones the tenant will have reviewed, and others you consider relevant.
The written agreement terminating the lease should address at least the following terms and conditions, as well as others based on the unique circumstances of the tenancy being terminated:
Termination Date – Identify the date on which the term of the lease will terminate and the date on which the tenant will surrender possession; the two dates may be the same, but not necessarily, depending on the circumstances.
Termination Payments – Identify with specificity the timing and amounts of any termination payment or installment payments, including any conditions that must be satisfied before payment.
Condition of the Premises – Be specific about the condition in which the premises are to be surrendered. Leases typically provide that the tenant is not required to fix or repair the effects of normal wear and tear, but exactly what constitutes normal wear and tear may depend on the circumstances. A joint walk-through is a time-honored way to identify damage the tenant is required to repair and items the tenant is permitted to remove.
For example, in one recent situation, plastic guards on hallway corners had come off a couple of years earlier and had not been replaced. The tenant’s janitorial service had been allowing the cords of its vacuum cleaners and floor buffers to bend around the corners, eroding and damaging the paint and drywall – normal wear and tear?
The same tenant removed its office furniture upon termination. The tenant had painted the interior a few years earlier, but had not moved large furniture or file cabinets when painting. When the furniture and cabinets were removed, the landlord was not happy to find the two-tone paint – must the tenant paint?
If the tenant has an equipment lease or equipment financing (such as an SBA loan), consider the rights of the tenant’s equipment lessor or lender.
Consents – Keep in mind that consents of other interested parties may be required. For example, the tenant may need to obtain the consent of its franchisor, and the landlord may need to obtain the consent of its lender, venture partner or key investors.
Releases – Tenants and landlords typically have an interest in not having any further responsibilities or potential liabilities to the other following the termination. Mutual releases are therefore common in lease termination agreements. Weigh the effect of releasing only known claims, distinguished from releasing both known and unknown claims. Also consider exceptions from the releases, such as indemnities that survive for specific known events or risks.
Competition – Most often in the retail context, the tenant may want the landlord to commit not to lease the premises to a competitor of the tenant, and the landlord may want the tenant to commit not to lease space within a certain trade area or radius of the premises. Provisions of this nature restrain trade and may run afoul of state or federal antitrust laws; enforceability therefore needs to be analyzed and considered.
Representations and warranties – The landlord will want assurance that the tenant hasn’t assigned the lease or subleased the premises, and that the tenant has the right and authority to terminate the lease. Similarly, the tenant will want assurance that the landlord has the right and authority to terminate the lease. Again, consider the unique circumstances when considering the assurances each party will need from the other.
Terminating the Lease of Record – If a memorandum of the lease has been recorded, the parties will need to address to ensure the landlord’s title isn’t clouded.
Confidentiality – Both the tenant and the landlord have an interest in keeping the terms and conditions of the termination confidential, especially from other tenants of the landlord and from competitors of the tenant.
An agreement to terminate a tenant’s lease before the natural expiration of its term usually arises from a difficult situation; however, when the tenant and the landlord address not only the typical terms and conditions but also the unique circumstances of the situation, the parties are positioned go their separate ways with the opportunity to improve their respective stations—expectations satisfied, and unintended consequences minimized or eliminated.
We advise landlords and tenants on all aspects of leasing, including terminations. We are prepared to help you navigate your lease termination and ensure that the agreement is crafted to thoroughly address your individual situation. For assistance with a lease termination, please contact Mickey Maher at mmaher@hechtsolberg.com or Sadaf Behdin at sbehdin@hechtsolberg.com. Either can be reached at (619) 239-3444.