Accepting Early Terminations of Leases
Almost all leases include a contract provision detailing authorized bases for the early termination of the lease agreement. Those provisions are generally accepted as valid and enforceable by a competent court. In order for an early termination to occur, the applicable contract provision must be satisfied. Depending on which provision is met, the early termination may be automatic or require a separate agreement with the other party.
If the grounds for early termination are not set forth in a provision of the lease, then the early termination period may be negotiated between the parties in a separate termination agreement. Realty Income Corporation v. Brightmore Medical, L.L.C., 348 F. Supp. 3d 710, 723 (S.D. Tex. 2017). Most often, a separate termination agreement is utilized in the context of a temporary leave of absence or a partial termination. The separate agreement will specify the duration of the early termination period and address any applicable obligations of the parties while the lease is not in effect.
The early termination of a lease agreement is not typically regulated by the law, except to the extent that a party may seek to enforce its rights and obligations under the terms of the lease. The only statutory "right" for early termination of a commercial lease relates to a tenant’s right to early termination in the event of a natural disaster. Also, a tenant may avoid liability for lease payments if the tenant is relocated in connection with an eminent domain proceeding. Leasing, Leases, and Subleases, 34 Williston on Contracts § 57:47 (4th ed.); Tex. Prop. Code § 21.014(b). Otherwise, a tenant may have the right to early termination in accordance with the lease agreement’s contract provisions. A tenant may agree to a different right to early termination. Hurdle v. Cigna Healthcare, 78 S.W.3d 615 (Tex. App.—Dallas 2002, no pet.). For example, a tenant may commit to early termination based upon the passage of municipal legislation that will otherwise terminate the lease. Smith v. Western Greyhound Corp., 515 S.W.2d 120, 122 (Tex. Civ. App.—El Paso 1974, writ ref’d n.r.e.); See also Republic Nat’l Bank of Dallas v. Pep Block 3D, Ltd., No. 3:10-CV-0255-L, 2011 WL 204793, at *11 (N.D. Tex. Jan. 24, 2011) (provision for early termination, upon the sale of the subject property was held to be valid and enforceable). In addition , a tenant may negotiate the right to terminate the lease based upon the owner’s default under another agreement concerning the property. See Chestnut Tower, Ltd. v. Davco Group, Inc., 55 S.W.3d 793, 796-97 (Tex. App.—Dallas 2015, pet. denied).
From the perspective of the landlord, early termination provisions are usually included to ensure the tenant’s rental obligations are kept in force for some specified minimum term. The ability to cancel the lease has a direct impact on the ability to finance the property and can have a definite impact on the value of the property. See Realty Income Corporation v. Brightmore Medical, L.L.C., 348 F. Supp. 3d 710, 721 (S.D. Tex. 2017) (tenant’s right to early termination affected the landlord’s ability to secure financing); Chestnut Tower, Ltd. v. Davco Group, Inc., 55 S.W.3d 793, 798-800 (Tex. App.—Dallas 2015, pet. denied) (provision requiring landlord consent to early termination had significant impact on value). Greer v. Stonetrust Commercial Ins. Co., 314 S.W.3d 452, 472 (Tex. App.—Austin 2010, pet. denied) (leasing agency’s contractual right to terminate impacted value and refinance ability). Without a binding obligation, a tenant might be more likely to walk away from the lease. See Capelle-Smith Associates, Ltd. v. Oncor Elec. Delivery Co., LLC, 407 S.W.3d 5, 15, 19 (Tex. App.—El Paso 2013, no pet.) (absence of early termination provision likely contributed to tenant’s refusal to walk away from space); Libert Realt LLC v. Heritage Bank of Commerce, No. A138512, 2014 WL 4180546, at *4 (Cal. Ct. App. Aug. 25, 2014) (as a practical matter, the tenant has no motivation to continue paying rent for a building that is not being utilized).
The motivation for a tenant’s early termination of a lease may arise from an expansion or relocation of the tenant’s business or a change in a market condition. The need for a tenant to end a lease before its expiration date is most often the result of a merger, acquisition, expansion, relocation or consolidation. Chestnut Tower, Ltd. v. Davco Group, Inc., 55 S.W.3d 793, 798-800 (Tex. App.—Dallas 2015, pet. denied). In addition, a tenant may wish for early termination due to the loss of a major customer, unfavorable law or regulation, adverse environmental conditions, etc.
Legally Justified Reasons for Breaking a Lease Early
There are various legal grounds for the early termination of a lease. For both residential and commercial leases, a material breach of contract may provide grounds for both landlords and tenants to terminate the lease agreement prior to the expiration of the term. A material breach occurs when a party to a contract fails to perform its obligations under the contract in a way that deprives the other party of the benefits it is entitled to under the lease. Common material breaches that would support termination include failure to pay rent (commercial and residential), a significant alteration of the property without approval (commercial only), and maintaining the property in an unsafe or unhabitable state (residential only). Material breaches can be either anticipatory or non-anticipatory.
Anticipatory Breach: When a breach of contract occurs before the time for performance has arrived, it is termed an anticipatory breach. Anticipatory breaches occur, for example, when a lease requires a landlord to make certain improvements to the leased property by a specific deadline, and the landlord notifies the tenant before the deadline that it will not be making the improvements required by the deadline. An anticipatory breach permits the non-breaching party to terminate the lease immediately upon receiving notice.
Non-Anticipatory Breach: Otherwise known as a fundamental breach, non-anticipatory breaches occur after the lease term has commenced. A non-anticipatory breach occurs, for example, when a landlord accepts a tenant’s payment but refuses to allow the tenant access to the premises. Tenants may be limited in their ability to terminate the lease in reaction to a non-anticipatory breach, as many jurisdictions require conviction notice prior to lease termination. Tenants are typically required to wait out the notice period set forth in the lease before deciding to terminate the lease.
Tenants and landlords may also be able to break leases due to a legal right (e.g., military service, domestic violence, early termination under state law, etc.) or waivable rights (e.g., legal remedies for constructive eviction under state law, etc.). However, tenants or landlords may be required to meet certain conditions prior to breaking the lease. The rights of military service members to break a lease is discussed in further detail below.
Tenant Rights and Obligations
When it comes to early termination of a lease agreement, tenants have rights and responsibilities. If you are considering terminating a lease early, you may be wondering what your obligations are and how to properly go about the process. For purposes of this particular discussion, the section applies to tenants who have signed a lease to occupy a specific unit at a certain property. These tenants would normally have a full-term lease with fixed monetary amounts to be paid over a fixed period of time. Of course, such amounts would be spelled out with detail in the lease itself.
If you want to terminate a lease early, there is generally no obligation to do so. However, if you stop paying rent after you have vacated the unit or even before, you could potentially be exposed to liability for the amount of unfulfilled rent due under the lease. Depending on the lease terms, you could also be liable for additional damages if such damages are defined in the lease. Typically, a lease will describe the property as well as various obligations for both the landlord and tenant, including but not limited to repairs, entry to premises, quiet enjoyment, etc.
Tenants have a right to a security deposit prior to move-in, and the tenant is entitled to a return of the security deposit, minus any normal or agreed-upon expenses incurred by the landlord in preparing the unit for the tenant.
The tenant also has an obligation to leave the unit in the same condition as it was when taking possession, and must repair any damage that is not the fault of normal usage. Many tenants will necessarily have to repair some item, considering the wear-and-tear of any heavy duty appliance created in the normal course of its use. For example, if a refrigerator is loaded with food regularly, the unit will naturally accumulate some scratches and perhaps rust on the interior surfaces from food particles. This kind of wear-and-tear is typically acceptable, but you may not necessarily be free from repair obligations if an unknown leak occurred over a period of time and created mold in the walls of the unit.
There is no single key that unlocks the door of every property with a valid lease; the terms of the lease will govern your obligations as a tenant.
Landlord Rights and Options
In contrast to a tenant’s obligations on early termination, a departing tenant generally has no obligations to a landlord. Once a tenant terminates a lease, it is the landlord who then bears the duty to minimize damages resulting from the breach of the lease. In other words, the landlord can do nothing or, if possible under the terms of the lease (or by statute), is required to mitigate its damages by re-letting the rental space in an effort to recover any unpaid rent from the defaulting tenant. In most leases, a landlord’s duty to re-lease the space is subject to the requirement that it do so on terms which are no greater than or equal to the terms of the lease which the tenant prematurely terminates.
With regard to office lease transactions, landlords often reserve the right not to mitigate damages for their own benefit, but in order to be fair to a departing tenant, landlords should consider the impact on the tenant when responding to its request to terminate the lease and voluntarily choose to mitigate so as to avoid the costs associated with enforcing its landlord’s right to collect the full amount of the rent due through the end of the term of the lease. With retail leases, however, in many cases the lease agreement will require a landlord to mitigate its damages, so this issue will need to be addressed with respect to each lease on a case-by-case basis.
The nature of a landlord’s willingness to agree to an early termination of a lease is no different than the factors affecting a tenant’s willingness to terminate a lease early: cost. If a tenant has a lease with substantial remaining rent obligations, the agreement of a landlord to permit an early termination of the lease may be conditioned on the payment of a substantial termination fee. If, on the other hand, the tenant’s remaining liability to the landlord is limited to a submarket amount of rent otherwise due in the lease, or rent due during the time it takes to re-let the space, a landlord is generally more willing to agree to an early termination of a lease at little or no cost to the departing tenant.
In either case, however, a landlord will likely include in a termination agreement as a condition to agreeing to an early termination of a lease, the return of the premises in accordance with the lease, if a condition to the return closing, any tenant inducements (e.g. landlord-funded space improvements or tenant concessions) paid by the landlord upon a tenant’s leasing of the premises and the waiver of all of the landlord’s claims against the tenant under the lease known to it at the time of the termination agreement. A landlord will generally also require the confidential nature of any discussions between the landlord and tenant regarding the early termination of the lease.
An alternative to an early termination of a lease is a lease buy-out. A lease buy-out agreement is specially structured to avoid being considered a voluntary termination of the lease and to treat the transaction as a purchase of the tenant’s interest in the lease. The tenant obtains up front the right to receive a portion of the market value of the tenant’s remaining interest in the lease, thereby incentivizing the tenant to leave the leased premises. The landlord benefits under this type of arrangement by receiving some rent in advance under the lease while negotiating a negotiated exit from the lease (similar to an early termination of the lease) for the landlord, and it does so without upsetting the space’s landlord/tenant relationship with its other tenants by marketing the space as an available space for lease.
Negotiations for Early Termination of Leases
Just like the biggest deals in life, ending a lease agreement is often as complex as signing the first one. If a tenant is having difficulty meeting the immediate financial situation, this often leads to issues with agreeing upon how to end a lease. Failure to negotiate a clear, complete, and legally ascertainable settlement could lead to an endless slew of problems.
A good starting point for the negotiation is to reach out to the landlord first about your current situation. You can often expect the landlord will readily discuss the situation with you. Be ready to present proof as to why early termination will reduce losses and damages for both sides. If a discussion is not possible, you may proceed directly to presenting a proposal in the form of written communication. Considering leasing brokers and real estate agents, they have disclosed agency relationships with only one party in these situations . If they represent you as the tenant, they will only have your interests in mind when proposing a settlement. If they are representing the landlord, they will only have the landlord’s interests in mind. When dealing with an agent representing the landlord, the tenant should ask if the agent has also discussed similar terms with the landlord. A tenant should be prepared to discuss how to limit the obligation and liability to only the term of the unexpired lease. In such an event, the tenant may suggest paying an agreed upon sum for the landlord to use as a security deposit for the early termination. The tenant may also agree to pay additional rent for the optional early termination period, as well as other damages and losses, if any. Negotiating an early termination is highly nuanced and best left to the discretion of an experienced attorney or property owner with a thorough understanding of commercial lease agreements.
Financial Penalties and Obligations
In most cases, if you simply walk away from a lease before the end of the term, you may be liable to the landlord for the amount of lost rent over the remaining number of months in the lease. Even longer leases are comparatively short term, so long-term liability can be substantial.
You may think that you can simply give up your keys and be done with the rental, but most landlords are not required to let you do that. If you move out of the lease early, the law usually requires the landlord to take steps to lessen the loss:
- Court decisions and state law interpretations vary. Some regard a landlord as having a duty to attempt to re-rent the property at a fair price, even if re-renting it either will take great effort, or it will take a considerably long time.
- The lease itself may say that the landlord doesn’t even have to try to re-rent the property. If it doesn’t say anything along these lines, the landlord usually has to actively advertise to seek new tenants.
- You still remain liable until the landlord finds a new tenant, even if the vacancy lasts a while.
- If the landlord does succeed to the landlord’s credit, the landlord should mitigate damages, meaning the landlord can subtract the amount from the damages you owe.
- In some states, the landlord may be required to tell you whether the loss is accruing. In some states, the landlord has to tell you that it will try to re-rent or mitigate the damages before imposing penalties.
The lease itself may say what you owe if you terminate the lease early. A common provision limits your liability to the unpaid rent for the rest of the term (i.e., the stated rent for the remaining months). In other words, you would pay the market rent until it meets the balance of the remaining lease. A common lease also says that you will pay fees incurred by the landlord to re-rent the property, such as commissions for an agent to show the property, and advertising costs.
Other Alternatives to Breaking a Lease Early
Assuming the tenant is not in default, the landlord and tenant may consider subleasing or assignment, if the lease allows for such, as alternatives to early termination. Both options allow the tenant to obtain a return of its entire security deposit in most cases, as well as relieve the tenant from continuing responsibility under the lease.
Subleasings are particularly useful to the tenant when it still requires the space after the lease termination date. The sublease should cover the same term as the original lease and have terms no less favorable to the landlord than the lease. A sublease allows the tenant to collect rent and utilities from the subtenant while paying these expenses to the landlord, resulting in a cost neutral situation.
Assignment, transferring all rights in the lease from one party to another, is a good option to consider when a tenant moves and no longer has use for the leased premises. The assigned tenant then steps into the shoes of the former tenant and is liable to the landlord for all obligations under the lease.
The landlord, however, may require the original tenant to remain responsible for some or all obligations under the lease, especially if the original tenant continues to own the space after the termination of the lease. The landlord will want to preserve its options so that if the subsequent assignee fails to discharge its obligations under the lease, the original tenant will be liable, allowing the landlord to pursue indemnification and other remedies available under the original lease.
Transferring a lease to another party may also be possible if there is no benefit to the landlord or tenant in subleasing or assigning. The tenant and the landlord can agree in writing to terminate the lease, freeing both of them from future responsibilities and obligations. Typically, the lease termination will be based on a specific event, such as the date a new tenant is moving in, and will include details on how best to handle all outstanding obligations and contingencies. Termination of the lease in this manner may also require the tenant to pay a lease termination fee to the landlord.
Lease modifications and no fault terminations are other forms of modification to the lease term that allow a tenant to vacate earlier. Terminations for cause, such as tenant default, are not up for negotiation.
The original lease, amendments and correspondence between the parties are essential items for marketers to review and their legal counsel to prepare the closing documents.
Steps to Take Prior to Early Termination of a Lease
First, check the lease. Are there specific provisions about terminating the lease early? If so, can they be followed and properly exercised? Does the termination clause require notice? If so, how much notice? Once the agreement is terminated, are you prepared to move out and deliver possession back to the landlord?
If no termination clause exists, how will the early termination be handled? Will a new agreement need to be executed? Will an existing agreement be amended?
The lease agreement is not a final document, nor is it permanent, and is subject to ongoing changes as agreed to by the parties. A lease agreement can be modified throughout its term if done properly and with the right authority. In reviewing the lease agreement, examine who is authorized to sign for the landlord or tenant , what the specific area of discretion is, and how that individual is required to act.
In addition to reviewing the specific language of the lease agreement, if the landlord is a governmental entity, check on how the lease agreement was approved. Many lease agreements with government entities are not final until a specific resolution is enacted, and modification of the lease agreement before a resolution is enacted would be improper. Pay attention to requirements to obtain board approval or any other requirements outlined in the specific statutes and/or Charter language.
If you are unsure about how certain provisions of a lease agreement work or unsure of what steps are next, it may be important to consult with an attorney to discuss the situation so that you know exactly what steps need to be taken.