A landlord and tenant may agree to terminate a lease prior to the original expiration date for a number of reasons. An agreement may be made for the landlord's benefit and convenience, for example, to facilitate a buy-out in order to relet the premises for more profit, to accommodate a larger tenant or to redevelop the premises. At the same time a termination agreement may also benefit the tenant or may be mutually beneficial, for example, in today's economy some tenants are looking to cut costs by getting rid of unnecessary space. When entering into termination agreements, landlords should take into consideration those rights and obligations that survive the lease, instead of inadvertently cutting them off by a termination. Sometimes in their haste to get out quickly, landlords will overlook significant issues. This article suggests helpful tips for landlords to exit quickly, but carefully.
Put It In Writing
The statute of frauds requires that agreements for leasing real estate for a period longer than one year be in writing and signed by the party against whom enforcement is sought. If the agreement to lease must be in writing, an agreement to amend or terminate the lease must also be in writing. Otherwise, the agreement may be unenforceable.
Identify the Parties to the Lease
Oftentimes, the original parties to a lease change due to assignments, mergers, acquisitions or name changes. It is important to lay out in the recitals of the agreement the history of the lease, all relevant parties and the current parties to which the agreement relates. For example, reciting the dates and parties to the original lease and any lease amendments, and the chain of succession of any parties-in-interest will be helpful and effective in clarifying the identity of the parties to the lease and the termination agreement.
Effective Date and Delivery of Possession
Parties often negotiate and execute a termination agreement prior to the tenant actually vacating the premises. Although the agreement should be binding upon execution, the parties should clarify the actual effective date and time of the termination, that being, the Early Expiration Date. The landlord should also determine what condition it requires the premises to be in when the tenant vacates. A tenant may want to surrender the premises "as is," but the landlord will want to ensure that the tenant does not leave the premises in a hazardous condition, or even worse, that it does not contain hazardous materials. The landlord will also want to ensure that the tenant removes non-standard improvements that may be costly to remove, such as a vault.
Clarify Ongoing Rental Obligations
The parties should include a provision addressing the tenant's ongoing obligation to pay base rent and any additional rent due under the lease through the Early Expiration Date. The landlord should also address whether or not the tenant will be liable for any operating expenses or common area maintenance charges incurred prior to the Early Expiration Date that the landlord has not yet charged.
Termination Payments
Depending upon the reasons for termination, either the landlord or the tenant may be required to pay for the other party's agreement to terminate the lease early. The parties should include a provision detailing the amount of the termination payment, and the terms and timing by which the payment should be made. In some instances, the termination payment is paid upon execution of the agreement and, in others, the termination payment is paid on the delivery of the premises or the Early Expiration Date. The parties should include language stating that failure to make the termination payment is a default under the agreement and provide a broad list of remedies and courses of action.
Security Deposits
If the tenant has paid a security deposit, the parties should include language describing their intention for the landlord to either return the security deposit to the tenant or to retain the security deposit. Specific details as to how and when the security deposit will be returned should also be addressed in the agreement.
Terminate Rights of Possessory Interests
In those instances that the original tenant assigned its interest or sublet a portion of the premises so that other parties are in possession of the premises besides the original tenant, the landlord should require the tenant to obtain a written acknowledgment from all parties with possessory interests that they will have no right to occupy the premises after the Early Expiration Date.
Post-Termination Liabilities
Most leases contemplate that certain obligations of the parties will survive the end of the lease term. If the parties do not want to modify any post-termination liabilities, then they should not "cancel" or actually "terminate" the lease. Rather, it is better to simply state in the agreement that the expiration of the lease term is being accelerated and avoid using any language that could be construed as an intent to cancel or exonerate a party from post-termination lease obligations. It may even be prudent to specify the sections in the lease that are intended to survive the termination agreement.
Releases
The agreement should include a release of the landlord by the tenant of all claims that the tenant has or may have against the landlord arising out of the lease or out of the tenant's use or occupancy of the premises. The landlord should also ensure that the release does not become effective if the tenant does not meet its obligations, such as paying a termination fee or vacating the premises by the Early Expiration Date.
Confidentiality
The parties may desire to keep the terms of the early termination of the lease confidential. Oftentimes a landlord may not want other tenants on the property to know about the termination because it may limit its negotiating leverage with other tenants on the property with which it may pursue a termination. Yet, since it may be difficult to enforce a confidentiality provision, it may have little value. Once a confidentiality provision is breached the harm cannot be undone and any equitable relief will likely not repair the damage. A liquidated damages provision can fix the amount of damages to which the non-breaching party is entitled. Be sure to follow the state's specific requirements for enforcement of a liquidated damages provision. Also, if a duty to maintain confidentiality is included, the parties should retain the right to disclose the terms and provisions to their respective agents and professionals, so long as those individuals have been advised of the confidentiality requirements.
Representations by Tenant; Estoppels
A termination agreement can be an opportunity for the landlord to obtain representations and warranties akin to what would be included in an estoppel certificate. For example, the landlord will want the tenant to represent and verify: (1) the company or signatory's capacity to bind the tenant; (2) that the tenant is the rightful owner of the tenant's interest in the lease; (3) that the tenant has not assigned or subleased any interest in the leasehold premises; and (4) that the tenant has no knowledge of any claim against the landlord arising out of or relating to the lease and that it has not assigned to any third party any rights or claims pertaining to the lease that the tenant might otherwise have against the landlord.
Conclusion
Including the provisions noted in this article in a termination agreement will help landlords avoid overlooking any important issues when negotiating the termination of the lease.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.