Commercial Real Estate Leases: Planning Ahead for Early Termination

November1-17Long term leases of commercial real estate offer landlords a steady and reliable stream of income and provide tenants with an established business presence in a particular neighborhood. However, those benefits may be short lived in the event of an early termination of the lease.

Early terminations are typically caused by tenants who default under lease provisions but they may also be caused by landlords who choose to sell the property during the term of the lease. This article will address the ways landlords and tenants may protect themselves at the inception of the lease.

Commercial Landlords:  Rent Acceleration Clauses

Where an early termination results from a tenant’s default under the terms of the lease, the landlord is faced with the difficult task of re-letting the space to a new tenant.

A number of factors may influence the length of time that the commercial space remains vacant, including but not limited to, current market trends, the location of the space, and whether improvements were made to the space for the benefit of the long-term tenant that make the space more or less desirable to new tenants.  Thus, at the inception of the lease, it is important for landlords to take care to protect their interest in the event of a default by a tenant.

One of the best ways for landlords to protect their interests in the event of default by a long-term tenant is to include a liquidated damages clause in the lease.  Liquidated damages clauses specify a predetermined amount of money that must be paid in the event of a breach of the lease.  In the commercial lease context, a liquidated damages clause may provide for an acceleration of future rents owed following the early termination of the lease (“Rent Acceleration Clauses”).

Rent Acceleration Clauses provide landlords with security that they will obtain the full value of the lease in the event of an early termination from the defaulting tenant.  However, from the tenant’s perspective, Rent Acceleration Clauses constitute a significant penalty to pay for early termination of a lease.

November2-17Recently, Goldman & Pease represented a franchisor in a case where a franchisee tenant defaulted in a lease that contained a Rent Acceleration Clause, resulting in over $1 million owed to the landlord.  Even though the franchisor was not a party to the lease, the franchisor took significant steps to mitigate the landlord’s damages because the franchisor had an interest in maintaining its business presence at the leased premises.  [Read more…]