Learn how to incorporate a lease termination option in your commercial lease renewal or extension, and what to consider before, during, and after the negotiation.

The challenge for the LL is that the lender will only view it as a shorter term. One approach I have employed is to seek a proposal for the longer and shorter lease terms. Then propose a longer term deal with a termination option, using the delta in rent and concession between the two proposals as the basis for a reasonable penalty. Should you stay full term, you get the benefit of more favorable terms. Should you exercise the termination option, the LL recovers the cost close to or equal to the initial shorter term proposal. There are other variables such as one-time vs rolling option and reasonable notice. Those will vary based on property type, use, put back clause if any, etc. As noted above knowing your goals is important

How do you incorporate a lease termination option in a commercial lease renewal or extension?

A lease termination option is a clause that allows you or the landlord to end the lease before the expiry date, under certain conditions. It can give you more flexibility and control over your commercial space, especially if your business needs change over time. But how do you incorporate a lease termination option in a commercial lease renewal or extension? Here are some tips and considerations to help you negotiate a favorable lease termination option.

1 Know your goals

Before you approach the landlord, you should have a clear idea of why you want a lease termination option, and what kind of terms you are willing to accept. For example, do you want to terminate the lease early if your business grows or shrinks, if you find a better location, or if you face financial difficulties? How much notice do you need to give the landlord, and how much penalty do you expect to pay? How often can you exercise the option, and what are the restrictions or conditions?

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Tom McGovern

Corporate Real Estate Executive
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The challenge for the LL is that the lender will only view it as a shorter term. One approach I have employed is to seek a proposal for the longer and shorter lease terms. Then propose a longer term deal with a termination option, using the delta in rent and concession between the two proposals as the basis for a reasonable penalty. Should you stay full term, you get the benefit of more favorable terms. Should you exercise the termination option, the LL recovers the cost close to or equal to the initial shorter term proposal. There are other variables such as one-time vs rolling option and reasonable notice. Those will vary based on property type, use, put back clause if any, etc. As noted above knowing your goals is important

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Jon Bosch

Real Estate Commercial Litigation Associate
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Kickouts are tenant-oriented rights, which Landlords are not eager to give. Landlords want an unqualified stream of lease payments not subject to voluntary interruption, and so Termination options are usually only given to Tenants with significant bargaining power, a distinct reason for wanting an early termination, and then only under certain qualified circumstances such as loss of occupancy, loss of an anchor tenant, failure to meet a sales milestone after a window of time, violation of exclusive use, etc.

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Shreyansh S.

Associate Partner at Shree Legal Associate || Head Editor & Founder at LAWLOVELEGAL || Experienced in Commission Sales || Passionate Blogger || LLB & LLM in Constitutional & Administrative Law ||
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The key points for incorporating a lease termination option in a commercial lease renewal or extension: 1. Clear Definition: Define the terms of the termination option clearly in the renewal or extension agreement. 2. Negotiate Time Frame: Agree on a specific notice period for exercising the termination option, typically 90 to 180 days before the end of the lease term. 3. Set Terms: Establish terms and consequences for termination, including any associated fees or penalties. 4. Address Renewal Conditions: Clarify how the termination option affects the ability to renew or extend the lease. 5. Document and Review: Document the termination option in writing and periodically review and update the terms as needed.

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2 Review your current lease

Your current lease may already have a lease termination option, or it may prohibit it altogether. You should review your current lease carefully and look for any clauses that relate to lease termination, such as break clauses, early termination fees, or landlord consent. You should also check if your current lease has an automatic renewal or extension provision, and if so, how to opt out of it. If your current lease does not have a lease termination option, or if it has unfavorable terms, you may need to renegotiate it with the landlord.

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3 Negotiate with the landlord

Once you have a clear understanding of your goals and your current lease, you can start negotiating with the landlord. You should explain your reasons for wanting a lease termination option, and how it can benefit both parties. For example, you can emphasize that a lease termination option can help you adapt to changing market conditions, reduce vacancy risks, or avoid costly disputes. You should also be prepared to offer some concessions or incentives to the landlord, such as higher rent, longer notice period, or higher security deposit. You should also be flexible and realistic, and avoid making unreasonable or excessive demands.

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Ernest Wronka, SIOR CCIM GRI

Founder, Partner & President @ Wronka Ltd. | SIOR, CCIM, GRI
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Landlords have financing commitments to their lenders and others that have to be met. These commitments can be met by cooperation of the landlord and tenant continuing with the existing lease terms and the landlord cooperating with the tenant subleasing the space.

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4 Draft and review the lease termination option

After you reach an agreement with the landlord, you should draft and review the lease termination option carefully. You should make sure that the lease termination option is clear, specific, and consistent with the rest of the lease. You should also check for any errors, omissions, or ambiguities that could lead to confusion or disputes later. You should also consult a lawyer or a lease expert to ensure that the lease termination option complies with the applicable laws and regulations.

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5 Execute and monitor the lease termination option

Once you and the landlord sign the lease with the lease termination option, you should keep a copy of it and monitor it regularly. You should also keep track of any changes or events that could affect your lease termination option, such as rent increases, maintenance issues, or market trends. You should also communicate with the landlord regularly and maintain a good relationship. If you decide to exercise your lease termination option, you should follow the agreed procedures and terms, and document everything in writing.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Bart Binning

Commercial Development LLC
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Lease termination options depend on four additional issues: 1. whether it is a landlord’s or tenant’s market (ie what is the vacancy rate) 2. How big the lease space is in relation to the entire property 3. The amount of tenant improvements (TI) and whether the landlord or tenant is paying for the TI 4. On a retail property, does the current tenant attract traffic to the location

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How do you incorporate a lease termination option in a commercial lease renewal or extension?

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1 Know your goals

2 Review your current lease

3 Negotiate with the landlord

4 Draft and review the lease termination option

5 Execute and monitor the lease termination option

6 Here’s what else to consider

Lease Negotiations

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