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Thursday, July 14, 2011

Termination Options for Tenants

Termination options for tenants

Many tenants want early termination rights, to end their lease (or shrink their space) prior to the end of their natural lease term. There is always some cost associated with this; some payment is due from tenant to landlord, if the earlier termination (or reduction) is exercised. The stated rational of tenants asking for early termination rights is that they want to commit to a longer lease term and have the security of that longer term, but they need to have flexibility if their business turns bad or in a significant new direction, that requires less space or space in a different location.

However, owners that want to sell their buildings in today’s market are finding that the capital markets are spitting these provisions back out. Buyers do not want to consider or value this option for tenants in leases; they do not want an asset where they primary/anchor lease has such an early termination or reduction right, and buyers are backing away from deals, entirely, when these early terminations exist.

At some point, the rubber has to meet the road, on this topic. Landlords want (need) leases to provide an income stream, but not leases that will eliminate their chance to sell their building at an acceptable price. The ability of a tenant to get an early termination or reduction right in a lease, at a moderate buy-out price, has gotten much tougher in the last 6 months. The tenant had better really need the right and had better be ready to pay for it or to swap something else meaningful, for this right, because it has become a hotly contested point, as more landlords learn this hard lesson in the capital markets; no term – no sale.

Mark Elliott is a partner at Troutman Sanders LLP and contributed this post to the Atlanta Business Chronicle.