Considerations in Drafting and Negotiating Early Lease Terminations

Purpose of Termination

Along with carefully describing the lease that is about to be terminated, in whole or in part, the drafter should carefully consider the underlying purpose of the termination. Such purpose may include one or more of the following:

• Straightforward termination. For a variety of possible reasons, the landlord and tenant may have simply agreed to terminate the lease prior to its scheduled expiration.
• Partial termination. A tenant may be 'downsizing,' and the parties therefore may be terminating the lease as to only a portion of the leased premises.
• Relocation. The tenant may be relocating into different space in the same, or a different, property owned by the landlord or a related entity. Relocation into different space in the same property would more typically be addressed in an amendment that would redefine the leased premises, but some circumstances may lead the parties to include features of a lease termination as to the old leased premises. Relocation into space in a different property owned by the landlord or a related entity would typically require termination of the old lease, contingent upon the effectiveness of a new lease for the new premises.
• Purchase. This variation most often occurs when a ground tenant is to purchase the underlying fee title, and the ground lease is, therefore, to be terminated.

Method of Termination

There are at least two typical methods by which a lease may be terminated. The first involves a 'Termination Agreement' in which the operative provision will be similar to the following:

Termination. Subject to the satisfaction of the conditions set forth herein, effective as of 11:59 p.m. on _________, 20__ (the 'Termination Date'), the Lease shall be terminated and shall thereafter be deemed null, void and of no further force or effect whatsoever, it being agreed that upon termination of the Lease, neither Landlord nor Tenant shall have any further rights, obligations or liabilities in connection with the Lease except for those obligations which are contemplated by this Agreement or by the terms of the Lease to survive any termination of the Lease.

This method requires the drafter to consider carefully whether all the loose ends have been tied up. For example: What is intended to happen with respect to obligations arising prior to the Termination Date which remain unsatisfied? The most obvious example is rent, but presumably an astute landlord is not going to sign a termination agreement and allow it to be effective if the tenant is delinquent in the payment of rent. Perhaps, though, there are common area maintenance payments or adjustments of tax obligations that should survive termination. Also, the drafter using this method must consider the survival of the parties' respective obligations to indemnify each other for matters arising during the lease term; while these provisions are typically drafted to survive expiration or termination of the lease, attorneys drafting or negotiating a termination agreement cannot afford to assume that this is the case. Likewise, provisions concerning the required condition of the premises upon surrender, liability for holding over, and similar 'housekeeping' matters that would otherwise be governed by the terms of the lease will need to be addressed.

Another method of termination, elegant in its simplicity, accomplishes the task by simply amending the lease to accelerate its expiration date, as in the following example:

Modification of Term. Subject to the satisfaction of the terms and conditions set forth herein, Section __ of the Lease is hereby amended to provide that the Term shall expire at 11:59 p.m. on _________, 20__, as if such date were the date originally stipulated in the Lease for the expiration of the Term.

If the lease, as originally drafted, adequately addressed the concerns and obligations of the parties, which were intended either to be dealt with naturally upon lease expiration (eg, holdover and condition of the premises upon surrender), or to survive the expiration of the lease term (eg, indemnities and post-expiration financial adjustments), this method allows the original treatment of such concerns and obligations to continue in place, although taking effect as of an earlier date than originally contemplated. Of course, the careful practitioner still needs to confirm that this is the case, but if the parties were adequately protected by the original lease language, this approach may avoid needless effort and expense in negotiating matters that were already settled in the original lease negotiations. If other provisions need to be changed to accommodate the facts of the particular termination scenario, they can be modified in the same manner as in any other amendment. Finally, to address the continuing effect to those provisions that are not changed, the amendment should include a provision such as the following, often used in any lease amendment:

Ratification of Lease. All terms, conditions and provisions of the Lease not expressly amended hereby shall be and remain in full force and effect.

Contingencies

Regardless of the method chosen to document the termination, care must be given to address any contingencies to the effectiveness of the termination. The most common contingency, perhaps, is financial, and may include requiring the tenant to be current in the payment of all of its rent and other financial obligations, as well as, in many cases, the payment of a termination fee. The landlord will want a provision such as the following:

Termination Fee and Other Payments. Any provision hereof to the contrary notwithstanding, Tenant shall continue to pay Landlord all rent owed under the Lease, and shall be responsible for all costs, expenses and obligations otherwise owed by Tenant pursuant to the Lease, for all periods through the Termination Date. On or before the Termination Date, and as a condition of the effectiveness of the termination of the Lease, Tenant shall pay to Landlord, as consideration for allowing the early termination of the Lease, a lump sum fee of ___________ Dollars ($__________) (the 'Termination Fee').

Depending upon the nature and extent of the tenant's financial obligations under the lease and the method of termination chosen by the parties, the tenant may want to include a provision such as the following:

Other Financial Obligations. Effective as of the Termination Date, and as a condition of Tenant's obligation to pay the Termination Fee, (i) all applicable taxes shall be prorated and Tenant shall receive a credit or a cash payment from Landlord for any taxes prepaid by Tenant, prorated for the applicable tax period, with respect to any portion of such tax period commencing on the Termination Date, (ii) all utilities for Leased Premises shall be transferred and placed in the name of Landlord, and Tenant shall receive a credit or a cash payment from Landlord for any applicable utilities charges prepaid by Tenant, prorated for the applicable utility service period, with respect to any portion of such period commencing on the Termination Date, and (iii) Landlord shall provide to Tenant a letter confirming Tenant's delivery and Landlord's acceptance of the Leased Premises in the condition required by the Lease.

Another example of a provision addressing survival of financial obligations and other concerns, particularly in the context of a termination agreement, is:

Surviving Covenants. Nothing contained in this Termination Agreement shall be deemed to release or relieve (i) Landlord or Tenant of any obligation in the Lease which by the terms of the Lease or the terms of this Agreement survive the termination of the Lease, or (ii) Tenant of any obligation under the Lease relating to payments of Minimum Rent, Percentage Rent, Tenant's proportionate share of Common Area Costs, Tenant's proportionate share of real estate taxes, or utilities for all periods through the Termination Date.

If the landlord is agreeing to an early termination because it has a new tenant ready to take over the space, then the landlord will want a contingency such as:

Effectiveness Contingency. The effectiveness of this Amend-ment [Agreement] is contingent upon the execution of a lease between Landlord and [New Tenant] for the Leased Premises, upon terms and conditions satisfactory to Landlord in its sole discretion, not later than _______, 20__ (the 'New Lease Condition'). If the New Lease Condition is not satisfied on or before ________, 20__, this Amendment [Agree-ment] shall be null and void, and the Lease shall continue in full force and effect as if this Amendment [Agreement] had never been executed.

Similarly, in the case of a ground lease being terminated because the tenant is acquiring fee ownership of the property, the effectiveness of the ground lease termination should be conditioned upon closing of the purchase and sale transaction. In such a case, the lease termination would typically be executed and delivered at the purchase and sale closing.

Also, if the tenant is relocating to other space in property owned by the same landlord, then the landlord will want to require that the new lease be fully executed and effective and that the tenant shall have taken occupancy of the new space (and perhaps shall have begun the payment of rent) as conditions to the effectiveness of the termination. If the new space is owned by a different entity related to the original landlord (a likely possibility in this era of single-purpose entities), then the new landlord may need to be a party to the termination agreement for the purpose of tying the contingencies of each transaction together.

Authority

Particularly because the landlord and tenant are terminating an existing agreement that may affect other parties, the amendment or agreement should contain representations and warranties that the landlord and tenant have the requisite power and authority to enter into and to perform their obligations with respect to the termination, without the approval or consent of any other party. For example:

Tenant Representations, Warranties and Covenants. Tenant hereby represents, warrants and covenants that Tenant has total authority acting alone and without the consent of any other party to terminate the Lease in accordance with the provisions of this Agreement and that Tenant has taken all action necessary to authorize the execution and delivery of this Agreement and the performance of the obligations of Tenant hereunder.

Landlord Representations, Warranties and Covenants. Landlord represents, warrants and covenants that Landlord has total authority acting alone and without the consent of any other party to terminate the Lease in accordance with the provisions of this Agreement and that Landlord has taken all action necessary to authorize the execution and delivery of this Agreement and the performance of the obligations of Landlord hereunder.

Additionally, the consents of any other necessary parties must be ob-tained. Consent of the landlord's lender may be required under the terms of the applicable loan documents. Likewise, if the tenant has mortgaged its leasehold, consent of its lender will likely be required. Counsel in a termination transaction must also determine if another party has guaranteed the performance of the tenant's obligations under the lease. It may seem obvious that a guarantor would not complain at having the tenant's obligations brought to an early end, but wise practice dictates that the guarantor's consent to the termination should be obtained, as the facts of the particular termination may, in some respects, modify the guarantor's obligations in ways other than simply ending them earlier than originally anticipated.

Termination of Memorandum of Lease

If a memorandum of lease or similar instrument has been recorded in the applicable public records, the parties (particularly the landlord) will want to provide for recording a termination of such instrument. If the amendment method of termination is chosen and the lease already provides for recording a termination instrument, the mechanism will already be in place. In any event, the instrument to be recorded should be executed at the same time as the termination agreement or amendment, and the agreement or amendment should provide that the termination instrument will be recorded upon the satisfaction of any conditions to the effectiveness of the termination itself. If a termination agreement is used, it should also establish which party will pay the recording costs; this issue will also need to be addressed in a termination amendment if responsibility for recording costs relating to a termination is not already addressed in the lease.

Survival of Other Agreements

The parties may wish to specify that termination of the lease will not change the continuing effect of other agreements between them. For example, if a ground lease is being terminated because the ground tenant is purchasing the property (which is only part of a shopping center) from the landlord, the parties may wish to confirm, in a 'belt and suspenders' approach, that an existing reciprocal easement agreement or similar document governing the operation of the center will continue. This may be particularly important to the tenant if the property it is acquiring requires access, parking, or other rights over other property pursuant to such an agreement, as in the following provision:

Survival of REA. Any other provision of this Agreement to the contrary notwithstanding, Land-lord and Tenant, for themselves and their respective successors and assigns, hereby covenant and agree that the Reciprocal Easement and Operation Agree-ment dated ___________, 20__, and recorded [insert recording information] (the 'REA') (i) shall be and remain in full force and effect, (ii) shall be and remain superior to the lien and claims of any mortgagee of any property owned by Landlord or its successors and assigns. Landlord further covenants and agrees to amend the REA if necessary or appropriate to assure the continued enjoyment by Tenant of all rights (including, without limitation, access, parking, utilities, and similar matters) with respect to the Shopping Center, for the benefit of Tenant and the property acquired by Tenant from Landlord as of the date hereof, as existing under the Ground Lease and the REA immediately prior to the execution of this Agreement.

Conclusion

There are, of course, infinite variations and possibilities of provisions that may or should be included in a termination amendment or agreement, depending upon the facts of the particular case. This discussion has focused on several provisions and possibilities and has suggested some solutions, but no such discussion can contemplate all of the possible scenarios that may arise. The important point is that counsel for the parties must consider carefully the best method of termination for the case at hand, and the best way to address all applicable facts of the particular termination transaction in light of the specific provisions of the underlying lease.

John H. Lewis is a partner in the Boston office of Seyfarth Shaw LLP.

The first impression one may have when preparing to draft an early termination agreement is that such a document should be a simple matter. It is true that simplicity and brevity in drafting are, in most circumstances, admirable qualities, and it is equally true that we frequently draft and negotiate documents that are much more complex than most lease termination agreements. Nevertheless, as with any effort to document a transaction, care must be taken in the preparation and negotiation of such an agreement to avoid overlooking potential risks and to protect the client's interests. This article explores some considerations in documenting the early termination of a lease, though not necessarily in order of importance. Although some specific suggestions are made and some sample provisions are included, the primary intent of this discussion is to alert the leasing practitioner to various issues and pitfalls that may be encountered.

The Introduction

The recitals or other introductory provisions should clearly identify the underlying lease and all amendments, addenda, and other modification documents. As obvious as it may seem, the drafter should take particular care to recite the correct name and date of the underlying lease and each related document; it is good practice to add at the end of the detailed description a phrase such as 'as the same may have been further amended.' This all-inclusive list of prior documents should be defined collectively as the 'Lease' for purposes of the termination agreement. The goal, of course, is to be certain that there is no doubt as to the identity of the documents and relationships, which are the subject of the termination, and to declare the intent of the parties clearly to terminate those documents and relationships.

Purpose of Termination

Along with carefully describing the lease that is about to be terminated, in whole or in part, the drafter should carefully consider the underlying purpose of the termination. Such purpose may include one or more of the following:

• Straightforward termination. For a variety of possible reasons, the landlord and tenant may have simply agreed to terminate the lease prior to its scheduled expiration.
• Partial termination. A tenant may be 'downsizing,' and the parties therefore may be terminating the lease as to only a portion of the leased premises.
• Relocation. The tenant may be relocating into different space in the same, or a different, property owned by the landlord or a related entity. Relocation into different space in the same property would more typically be addressed in an amendment that would redefine the leased premises, but some circumstances may lead the parties to include features of a lease termination as to the old leased premises. Relocation into space in a different property owned by the landlord or a related entity would typically require termination of the old lease, contingent upon the effectiveness of a new lease for the new premises.
• Purchase. This variation most often occurs when a ground tenant is to purchase the underlying fee title, and the ground lease is, therefore, to be terminated.

Method of Termination

There are at least two typical methods by which a lease may be terminated. The first involves a 'Termination Agreement' in which the operative provision will be similar to the following:

Termination. Subject to the satisfaction of the conditions set forth herein, effective as of 11:59 p.m. on _________, 20__ (the 'Termination Date'), the Lease shall be terminated and shall thereafter be deemed null, void and of no further force or effect whatsoever, it being agreed that upon termination of the Lease, neither Landlord nor Tenant shall have any further rights, obligations or liabilities in connection with the Lease except for those obligations which are contemplated by this Agreement or by the terms of the Lease to survive any termination of the Lease.

This method requires the drafter to consider carefully whether all the loose ends have been tied up. For example: What is intended to happen with respect to obligations arising prior to the Termination Date which remain unsatisfied? The most obvious example is rent, but presumably an astute landlord is not going to sign a termination agreement and allow it to be effective if the tenant is delinquent in the payment of rent. Perhaps, though, there are common area maintenance payments or adjustments of tax obligations that should survive termination. Also, the drafter using this method must consider the survival of the parties' respective obligations to indemnify each other for matters arising during the lease term; while these provisions are typically drafted to survive expiration or termination of the lease, attorneys drafting or negotiating a termination agreement cannot afford to assume that this is the case. Likewise, provisions concerning the required condition of the premises upon surrender, liability for holding over, and similar 'housekeeping' matters that would otherwise be governed by the terms of the lease will need to be addressed.

Another method of termination, elegant in its simplicity, accomplishes the task by simply amending the lease to accelerate its expiration date, as in the following example:

Modification of Term. Subject to the satisfaction of the terms and conditions set forth herein, Section __ of the Lease is hereby amended to provide that the Term shall expire at 11:59 p.m. on _________, 20__, as if such date were the date originally stipulated in the Lease for the expiration of the Term.

If the lease, as originally drafted, adequately addressed the concerns and obligations of the parties, which were intended either to be dealt with naturally upon lease expiration (eg, holdover and condition of the premises upon surrender), or to survive the expiration of the lease term (eg, indemnities and post-expiration financial adjustments), this method allows the original treatment of such concerns and obligations to continue in place, although taking effect as of an earlier date than originally contemplated. Of course, the careful practitioner still needs to confirm that this is the case, but if the parties were adequately protected by the original lease language, this approach may avoid needless effort and expense in negotiating matters that were already settled in the original lease negotiations. If other provisions need to be changed to accommodate the facts of the particular termination scenario, they can be modified in the same manner as in any other amendment. Finally, to address the continuing effect to those provisions that are not changed, the amendment should include a provision such as the following, often used in any lease amendment:

Ratification of Lease. All terms, conditions and provisions of the Lease not expressly amended hereby shall be and remain in full force and effect.

Contingencies

Regardless of the method chosen to document the termination, care must be given to address any contingencies to the effectiveness of the termination. The most common contingency, perhaps, is financial, and may include requiring the tenant to be current in the payment of all of its rent and other financial obligations, as well as, in many cases, the payment of a termination fee. The landlord will want a provision such as the following:

Termination Fee and Other Payments. Any provision hereof to the contrary notwithstanding, Tenant shall continue to pay Landlord all rent owed under the Lease, and shall be responsible for all costs, expenses and obligations otherwise owed by Tenant pursuant to the Lease, for all periods through the Termination Date. On or before the Termination Date, and as a condition of the effectiveness of the termination of the Lease, Tenant shall pay to Landlord, as consideration for allowing the early termination of the Lease, a lump sum fee of ___________ Dollars ($__________) (the 'Termination Fee').

Depending upon the nature and extent of the tenant's financial obligations under the lease and the method of termination chosen by the parties, the tenant may want to include a provision such as the following:

Other Financial Obligations. Effective as of the Termination Date, and as a condition of Tenant's obligation to pay the Termination Fee, (i) all applicable taxes shall be prorated and Tenant shall receive a credit or a cash payment from Landlord for any taxes prepaid by Tenant, prorated for the applicable tax period, with respect to any portion of such tax period commencing on the Termination Date, (ii) all utilities for Leased Premises shall be transferred and placed in the name of Landlord, and Tenant shall receive a credit or a cash payment from Landlord for any applicable utilities charges prepaid by Tenant, prorated for the applicable utility service period, with respect to any portion of such period commencing on the Termination Date, and (iii) Landlord shall provide to Tenant a letter confirming Tenant's delivery and Landlord's acceptance of the Leased Premises in the condition required by the Lease.

Another example of a provision addressing survival of financial obligations and other concerns, particularly in the context of a termination agreement, is:

Surviving Covenants. Nothing contained in this Termination Agreement shall be deemed to release or relieve (i) Landlord or Tenant of any obligation in the Lease which by the terms of the Lease or the terms of this Agreement survive the termination of the Lease, or (ii) Tenant of any obligation under the Lease relating to payments of Minimum Rent, Percentage Rent, Tenant's proportionate share of Common Area Costs, Tenant's proportionate share of real estate taxes, or utilities for all periods through the Termination Date.

If the landlord is agreeing to an early termination because it has a new tenant ready to take over the space, then the landlord will want a contingency such as:

Effectiveness Contingency. The effectiveness of this Amend-ment [Agreement] is contingent upon the execution of a lease between Landlord and [New Tenant] for the Leased Premises, upon terms and conditions satisfactory to Landlord in its sole discretion, not later than _______, 20__ (the 'New Lease Condition'). If the New Lease Condition is not satisfied on or before ________, 20__, this Amendment [Agree-ment] shall be null and void, and the Lease shall continue in full force and effect as if this Amendment [Agreement] had never been executed.

Similarly, in the case of a ground lease being terminated because the tenant is acquiring fee ownership of the property, the effectiveness of the ground lease termination should be conditioned upon closing of the purchase and sale transaction. In such a case, the lease termination would typically be executed and delivered at the purchase and sale closing.

Also, if the tenant is relocating to other space in property owned by the same landlord, then the landlord will want to require that the new lease be fully executed and effective and that the tenant shall have taken occupancy of the new space (and perhaps shall have begun the payment of rent) as conditions to the effectiveness of the termination. If the new space is owned by a different entity related to the original landlord (a likely possibility in this era of single-purpose entities), then the new landlord may need to be a party to the termination agreement for the purpose of tying the contingencies of each transaction together.

Authority

Particularly because the landlord and tenant are terminating an existing agreement that may affect other parties, the amendment or agreement should contain representations and warranties that the landlord and tenant have the requisite power and authority to enter into and to perform their obligations with respect to the termination, without the approval or consent of any other party. For example:

Tenant Representations, Warranties and Covenants. Tenant hereby represents, warrants and covenants that Tenant has total authority acting alone and without the consent of any other party to terminate the Lease in accordance with the provisions of this Agreement and that Tenant has taken all action necessary to authorize the execution and delivery of this Agreement and the performance of the obligations of Tenant hereunder.

Landlord Representations, Warranties and Covenants. Landlord represents, warrants and covenants that Landlord has total authority acting alone and without the consent of any other party to terminate the Lease in accordance with the provisions of this Agreement and that Landlord has taken all action necessary to authorize the execution and delivery of this Agreement and the performance of the obligations of Landlord hereunder.

Additionally, the consents of any other necessary parties must be ob-tained. Consent of the landlord's lender may be required under the terms of the applicable loan documents. Likewise, if the tenant has mortgaged its leasehold, consent of its lender will likely be required. Counsel in a termination transaction must also determine if another party has guaranteed the performance of the tenant's obligations under the lease. It may seem obvious that a guarantor would not complain at having the tenant's obligations brought to an early end, but wise practice dictates that the guarantor's consent to the termination should be obtained, as the facts of the particular termination may, in some respects, modify the guarantor's obligations in ways other than simply ending them earlier than originally anticipated.

Termination of Memorandum of Lease

If a memorandum of lease or similar instrument has been recorded in the applicable public records, the parties (particularly the landlord) will want to provide for recording a termination of such instrument. If the amendment method of termination is chosen and the lease already provides for recording a termination instrument, the mechanism will already be in place. In any event, the instrument to be recorded should be executed at the same time as the termination agreement or amendment, and the agreement or amendment should provide that the termination instrument will be recorded upon the satisfaction of any conditions to the effectiveness of the termination itself. If a termination agreement is used, it should also establish which party will pay the recording costs; this issue will also need to be addressed in a termination amendment if responsibility for recording costs relating to a termination is not already addressed in the lease.

Survival of Other Agreements

The parties may wish to specify that termination of the lease will not change the continuing effect of other agreements between them. For example, if a ground lease is being terminated because the ground tenant is purchasing the property (which is only part of a shopping center) from the landlord, the parties may wish to confirm, in a 'belt and suspenders' approach, that an existing reciprocal easement agreement or similar document governing the operation of the center will continue. This may be particularly important to the tenant if the property it is acquiring requires access, parking, or other rights over other property pursuant to such an agreement, as in the following provision:

Survival of REA. Any other provision of this Agreement to the contrary notwithstanding, Land-lord and Tenant, for themselves and their respective successors and assigns, hereby covenant and agree that the Reciprocal Easement and Operation Agree-ment dated ___________, 20__, and recorded [insert recording information] (the 'REA') (i) shall be and remain in full force and effect, (ii) shall be and remain superior to the lien and claims of any mortgagee of any property owned by Landlord or its successors and assigns. Landlord further covenants and agrees to amend the REA if necessary or appropriate to assure the continued enjoyment by Tenant of all rights (including, without limitation, access, parking, utilities, and similar matters) with respect to the Shopping Center, for the benefit of Tenant and the property acquired by Tenant from Landlord as of the date hereof, as existing under the Ground Lease and the REA immediately prior to the execution of this Agreement.

Conclusion

There are, of course, infinite variations and possibilities of provisions that may or should be included in a termination amendment or agreement, depending upon the facts of the particular case. This discussion has focused on several provisions and possibilities and has suggested some solutions, but no such discussion can contemplate all of the possible scenarios that may arise. The important point is that counsel for the parties must consider carefully the best method of termination for the case at hand, and the best way to address all applicable facts of the particular termination transaction in light of the specific provisions of the underlying lease.

John H. Lewis is a partner in the Boston office of Seyfarth Shaw LLP.