The Trump administration, as part of its initial round of cost
reduction efforts, has threatened to terminate the federal
government's leases in commercial buildings around the country.
The target is a 50% reduction in office space occupied by the
federal government. On January 27, 2025, only a week into the new
administration, the Department of Government Efficiency (DOGE)
announced that it already had terminated three U.S. General Services
Administration (GSA) leases as the "first steps" to
"right size the federal real estate portfolio of more than
7,500 leases."
While the administration's ambitions are unprecedented, this
is not actually a new initiative. Indeed, there is a long history
of efforts to save money by reducing GSA's leasing obligations
and property portfolio. And the Trump administration, through
newly-appointed GSA Commissioner of the Public Buildings Service
Michael Peters, appears to be already working to implement various
reduction plans.
But there are limits on GSA's ability to terminate leases.
Unlike nearly all other federal government contracts, GSA leases do
not contain the standard "termination for convenience"
clauses that allow the government customer at any time to interrupt
performance of a contract and reimburse the contractor for the cost
of winding down operations. Therefore, any effort by GSA to
terminate leases during what is referred to as the "firm
term" of those leases — the term during which there is
no "termination for convenience" right — simply
because the government decides it wants to reduce the federal
footprint will constitute a breach of the lease and entitle the
property owner to damages.
There are, however, a few avenues for the federal government to
terminate GSA leases before the end of the expiration of the lease.
First, GSA leases often contain two terms: (1) the "Firm
Term" during which the government has limited termination
rights and (2) the remaining term. Once the Firm Term expires, the
government tenant can terminate the lease by notifying the
landlord. Leases often provide that the termination is effective
upon the date set forth in the notice but no sooner than three or
four months after delivery of the notice. So long as the tenant has
fully moved out before the notice period expires, the lease
terminates. Any GSA lease past the "Firm Term" period is
a much more likely target for unilateral termination under the
current initiative, and landlords should be prepared.
Such time-based termination provisions render a certain percentage
of GSA leases terminable at will each year. Commercial real estate
consulting firm Trepp recently published an analysis stating that,
each year, termination rights become available in 4% to 9% of the
GSA's leases nationwide.1 This number masks a
greater impact in urban areas, where Trepp estimates that the
federal government may already have termination rights for over 25%
of its leases. And those numbers may be far higher in major cities
like Atlanta, where the number may be as high as 45% this
year.2 As a result, the potential effect in some markets
may be profound.
There are also, however, limited ways for the government to
terminate its leases before the end of the Firm Term. Most notably,
as in commercial situations, GSA leases permit termination for
default by the government should the landlord fail to meet its
obligations. In particular, the GSA Acquisition Manual requires
leases to include a term described in 552.270-22 (Default by Lessor
During the Term), which permits the government to claim default for
any failure by the landlord to perform the requirements of the
lease, such as failure to maintain the premises.3
Accordingly, this new administration initiative makes it critical
that landlords quickly determine if the government has any basis to
claim default of this kind. In addition, landlords should make sure
that they have accurate and comprehensive records of repairs and
maintenance, as well as records of when they received and how they
have addressed any complaints from the government
tenant.4 Landlords should be especially mindful of
special requirements incorporated in their leases beyond normal
maintenance, such as particular security measures or services that
must be provided by the landlord. Such requirements can be complex,
and GSA may attempt to rely on the landlord's purported failure
to adhere to them to justify early termination.
Finally, GSA could look to one unusual provision in its leases to
essentially effect a termination. Unlike commercial leases, GSA
leases typically include clauses providing for reduced rental
payments upon the government's vacation of the
property.5 Owners should familiarize themselves with the
terms of such vacancy clauses to understand what leverage the
government may have, even during the "Firm Term."
Importantly though, whether or not a lease is subject to
unilateral termination, other rules of GSA leasing still apply. For
example, regardless of the basis for termination, the government
must set — and meet — a firm vacancy date. If the
government is still occupying the leased space after that date, the
landlord obtains so-called "holdover rights" that entitle
the landlord to rent payments based on the market value of the
property, which is often much higher than the negotiated rent in
the lease. Given the aggressive and accelerated nature of the
administration's efforts to terminate leases, unprepared
federal tenants may be unable to vacate within the established
deadlines, presenting opportunities and leverage to
landlords.
While the federal government's interest in reducing its real
estate costs is hardly new, we have entered uncharted waters.
Landlords should understand their leases, the status of operations
at their government-leased properties, and be ready to negotiate
with their federal tenants. There may be opportunities, including
negotiating with the government, to minimize the effect of
threatened lease terminations.
Footnotes
1. Thomas Taylor, “DOGE Looks to Cut GSA-Leased Office Space: Quantifying the Impact on Key MSAs,” TreppTalk Blog, Jan. 24, 2025 at Fig. 1.
2. Id. at Fig. 3.
3. GSAM 570.703; 552.270-22
4. See, e.g., 27-35 Jackson Ave. LLC v. United States, 162 Fed. Cl. 550 (2022) (COFC upholds GSA lease termination for failure to maintain premises due to malfunctioning sprinkler system).
5. GSAM 552.270-16 (Adjustment for Vacant Premises).
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