June 2, 2017
In commercial tenant space, whether office, warehouse, manufacturing or retail, landlords typically want three-, five- or seven-year lease terms. And this is reasonable given the cost of tenant build-out, Realtor commissions and the demands of their mortgage lenders. It also is relatively standard in the marketplace.
However, a tenant will rightfully reason that they can’t anticipate their space needs for a year much less over a seven-year period of time. The company might need to relocate, be bought out or go out of business, the principal could die or become disabled, or the tenant’s business model could change substantially.
One concession I recommend that tenants request in a commercial lease is an early-termination option. By having the right to walk away from a lease, it gives enormous flexibility and power to a tenant. Recently, a landlord explained to me that he is glad to offer this tenant concession.
Typically, a termination option is not free. Here are typical issues a landlord will want to discuss:
- The lease termination option might not kick in until some period into the lease, say after the first year.
- The landlord will want generous advance notice provisions, say three to six months to allow him to advertise and market the premises for re-letting to a new tenant.
- An early termination fee of anywhere from three months to one year of base rent and CAM charges.
- A reimbursement of Realtor fees paid (many times paid up front, but calculated on the entire lease term value).
- A reimbursement of tenant improvement costs.
So often I am consulted after the fact by a tenant who wants “out” of their lease on a document we were not asked to help negotiate, and the tenant is in a real spot. Sometimes in that circumstance the landlord is digging in his heels wanting the full rent and CAM amounts for the entire lease period — and they may well be entitled to that.
But if only the tenant had asked for this simple concession on the front end — when he had negotiating power — his life would be simpler and his finances richer.