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Early Termination Provisions: A Landlord's Saving Grace … If Done Right
To commercial landlords, the ideal lawyer is one that can predict the future. And in the context of buying and selling New York City real estate, that means lawyers who can craft lease provisions to pre-emptively thwart tenant-holdouts seeking cash buyouts in exchange for surrendering and vacating their premises. The scenario usually plays out like this: landlord markets the building for sale; buyer tenders an offer on the condition that the building be conveyed vacant on the closing date; tenant demands an exorbitant amount of money from landlord in exchange for vacatur; landlord scours the lease for any possible tactical advantage in its negotiation with tenant; landlord finds none and capitulates to tenant's demand or loses the deal. A win/win for the tenant.
A lease provision that affords landlords the tactical advantage they need in such scenarios, and the focus of this article, is the “early termination provision” (hereinafter as the termination provision). Specifically, this article seeks to: 1) guide the practitioner through the pitfalls of a poorly drafted termination provision; and 2) advise the practitioner how to craft a proper and effective termination provision.
Case Study
The following termination provision was encountered by this author in connection with a building that a client was considering purchasing:
It is understood and agreed that the landlord shall have the right to cancel the within lease in the event the building of which the demised premises forms a part is to be demolished on the following terms and conditions:
a) In no event shall the effective termination date be prior to June 30, 2010.
b) Provided tenant vacates on or before the effective termination date, landlord shall pay tenant the sum of $36,000.00 should said cancellation occur during the period July 1, 2011 through June 30, 2012. The amount to be paid the tenant shall decrease by the sum of $7,200 with each subsequent year.
We chose this provision as our case study in order to learn from the oversights of its author. (For pedagogical purposes, and to protect the innocent, our case study has been minimally doctored.) While there are numerous ways that our case study can be improved upon, for the sake of brevity we focus on four mistakes, which, if corrected, would dramatically increase the provision's potency:
- Ambiguity over the meaning of “demolition;”
- Ambiguity as to what notice or event triggers the right to terminate;
- Ambiguity as to the timing of tender of the tenant's termination payment; and
- Ensuring the termination provision is drafted as a conditional limitation.
Each of these four issues is explored, in turn, below.
Ambiguity over the Meaning of 'Demolition'
Our case study allows a landlord to terminate in only one instance — a building demolition (to wit, “in the event the building of which the demised premises forms a part is to be demolished …”). This is not only vague (what qualifies as a “demolition”?), but unnecessarily restrictive as well.
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