Negotiating the Lease Termination

In today’s climate, an unfortunate number of businesses are unprofitable and are forced to close their doors.  Gross & Romanick, P.C. has noticed a significant increase in the number of tenants requesting early lease terminations.  Many of these businesses have made great efforts to stay afloat during the last few years, but simply cannot operate any longer.

For many landlords, negotiation of a lease termination agreement is a better option than simply allowing a tenant to desert the premises and return the keys to the property manager.  Without a termination agreement, the landlord is left in the unfavorable position of having to file a lawsuit to obtain a judgment for money damages.  In Virginia, if the landlord takes back the space after the tenant deserts the premises (i.e. the landlord does not sue for possession of the space), the landlord may be forced to file its lawsuit in the more expensive Circuit Court to recover a judgment for damages.  In addition, many Circuit Court judges are unwilling to award damages  for rent that would be owed through the expiration of the lease term, if that date is in the future. 

On the other hand, negotiating a lease termination agreement allows the landlord to: (a) receive a “termination fee”; (b) set a firm move-out date; (c) obtain a full release of any claims the tenant may have against the landlord; and, (d) reinforce or amend lease provisions on such issues as the security deposit, repairs to the premises, and the disposition of property left at the premises.  If the termination agreement is artfully drafted, the landlord can strengthen its legal position and reserve all of its rights under the lease.  Thus, in the event the tenant breaches the termination agreement and the landlord is forced to file a lawsuit, the landlord’s case will be stronger than a case based on the lease alone, and irritating counterclaims will be less likely (or even precluded).

The landlord should take several factors into consideration when negotiating the “termination fee”, including but not limited to the following: (a) the financial strength of the tenant and its parent companies, if any; (b) whether or not there are personal guarantors of the lease; (c) the length of the remaining term of the lease; (d) the presence of any viable counterclaims against the landlord; (e) the out of pocket costs the landlord has incurred to improve the premises; and (f) the likelihood of re-letting the premises.  In many cases it will be necessary for the landlord to review the tenant’s (and any guarantor’s) financial statements. 

Lease termination agreements may prove to be useful in a variety of situations.  Our attorneys find them particularly useful for tenants who have little to offer the landlord.  With these tenants, it makes more economic sense for a landlord to get something while the tenant is prepared to make an offer, as opposed to filing a lawsuit and trying to collect on a judgment that is likely not collectible.  In our experience, landlords do not have great success collecting money from this type of tenant after securing a judgment.  By the time the judgment is secured, the tenant has no incentive to pay the landlord, has probably paid other creditors in lieu of the landlord and may even file for bankruptcy.  Of course, the landlord should always make an informed decision and request financial records from a tenant that is pleading poverty.

Many landlords are opposed to the idea of negotiating an early lease termination.  They would rather obtain a judgment from the Court than another written promise from the tenant.  And, there certainly is risk involved with a lease termination agreement. However, every situation is unique and the landlord should undertake an informed cost/benefit analysis to determine the best course of action.

When negotiating a lease termination agreement, it is important that the landlord consult a knowledgeable attorney throughout the process.  An attorney can draft provisions which protect and reserve certain rights of the landlord without weakening the landlord’s legal position.   The agreement should also make it easy for the landlord to obtain a judgment in the event of a default by the tenant (such as by execution of a consent order or confession of judgment).  These provisions can be tricky, so it is important that they are properly drafted and incorporated into the lease termination agreement.