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The Exit Strategy

BY Glenn A. Browne
July 02, 2015

When a tenant enters into a long-term lease obligation, all of the thoughts and questions are generally positive: “How much money will I make?” “How will I expand my business?” “How will I add new employees to my business?” However, equally as important are questions that are slightly more negative, such as, “Will I be able to terminate the lease if my sales are less than expected?” “Will I be able to assign this lease to another entity if I want to sell my business?” “Will I be able to terminate the lease if there is a casualty, including a fire, in the premises or retail facilities near the end of the term, so that I will not need to rebuild the premises following such casualty?” This article addresses different ways that these types of questions and issues can be addressed by tenants in order to create “exit strategies” for their lease obligations.

The Failing Business

Since most lease obligations for tenants entail long-term obligations, a tenant should consider negotiating a provision that would allow it to terminate the lease in the event a certain level of sales was not achieved. While landlords often resist providing early termination options in the lease, most notably because: 1) the value of the lease is based upon the certain term and lenders will devalue or completely eliminate from consideration a term that exists beyond an early termination right; 2) if the landlord is investing funds in the construction of the premises, it wants a sufficient amount of time to amortize its contribution; and 3) the belief that the landlord has little control over the sales that the tenant would be able to achieve. Notwithstanding the foregoing, landlords may consider incorporating an early termination right in the lease if: 1) the early termination right is negotiated up front as part of the business terms negotiation; 2) the termination rights are clearly established with protections for the landlord if the tenant fails to operate in accordance with the terms of the lease; and 3) the landlord is made whole for contributions that the landlord may have made to the construction of the premises and in brokerage commissions for the obtainment of the tenancy. A typical provision that may be negotiated would read as follows:

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