The Lowdown On Lease Termination Clauses: The Essentials

What Is A Lease Termination Clause?

Lease agreement termination clauses are stipulations in a rental agreement between a landlord and a tenant that specify how and when the lease may be ended. These clauses are so important that more than half of renters read their lease termination clauses before signing their rental agreements.
Different types of lease termination clauses may include fixed-term, month-to-month, at-will and for-cause clauses. Fixed-term lease agreement termination clauses state that the lease will run for a pre-specified period of time — for example, six months or one year. These leases cannot be terminated until the agreed-upon term finishes unless both parties decide on an early termination.
Unlike fixed-term lease agreements, month-to-month lease agreement termination clauses may be terminated by the landlord or tenant with proper notice. The required notice is usually detailed in the contract , but in most cases is 30 days. Some states require 60 or 90 days’ notice, and others require that landlords notify tenants every month of the need to vacate the property in 30 days. There are exceptions to the notice requirement that may apply to lease agreements for senior housing or disabled tenants and family members who receive public housing assistance.
At-will lease agreement termination clauses allow either the tenant or landlord to end the lease at any time without notice. Although the terms of the lease are still legally binding, tenants should not have difficulty with finding a new residence due to an at-will termination clause.
Another kind of lease agreement termination clause is a for-cause clause that terminates your agreement if you do not fulfill all of your obligations under the terms of the lease.

Common Types Of Termination Clause found In Lease Agreements

Termination clauses in lease agreements vary based on the terms and conditions of each agreement. However, there are some common types of termination clauses that parties encounter in lease agreements today.
The most common type of termination clause specifies an early termination date. Parties specify the date they would like their contractual obligations under the lease agreement to come to an end. This is common when the parties have determined an anticipated end date for their lease terms.
Sometimes a breach of contract clause is included in a termination clause. The parties set out that should there be an irremediable breach or an irremediable failure of a party to fulfil its obligations under the lease agreement, this may entitle the other party to terminate the lease agreement. Respecting the required constraints of the breach clause and acting in good faith, the aggrieved party may elect to give notice in writing, terminate the agreement or agree to remedial conditions to remedy the breach.
A mutual termination clause allows the parties to select a date of termination through mutual agreement. They may select this date at their convenience or after they have completed their obligations under the agreement.
In some cases, the parties may wish to provide for the lease agreement to be terminated by force of law or on an event of force majeure. Often the clause will set out that the lease agreement will be void and unenforceable upon the happening of certain events.
Parties may also agree that the lease agreement will be signed subject to certain conditions. Where those conditions do not take place, the lease will be of no effect.
Finally, lease agreements typically include a clause outlining the rights that parties have following expiry or termination of the lease agreement. Parties may outline the obligations for the return of property at the end of the lease agreement or whether there are any outstanding obligations.

Legal Implications Of Lease Agreement Termination

Termination of a lease agreement may have several legal implications depending on whether the landlord or tenant has the right to terminate the lease. If a tenant has the right to terminate the lease, the tenant is entitled to a refund of any amounts already paid in terms of the agreement together with interest from the date on which the amount was paid until the refund is made by the landlord. The tenant will however not be entitled to claim any damages from the landlord unless an express term entitling the tenant to claim damages is included in the contract.
The most common penalties for the tenant where the tenant has defaulted on the rental payment, are the following: While common, it is all too often by mistake that leases contain clauses that subject the tenant to exorbitant penalties despite the presence of the Consumer Protection Act. Despite the commonness of a clause in a lease agreement providing for penalties in the event of an early cancellation, the Consumer Protection Act makes such a clause void, i.e. unenforceable. The simplest form of remedy made available to the tenant in this regard is to apply for the cancellation thereof.
For a more extensive discussion on the validity of such clauses and wider discussion on the implications of the CPA on lease agreements, please refer to our separate blog post on the topic.
Where the landlord is in default in terms of the lease agreement (and the tenant is not in default), the tenant cannot terminate the lease agreement but is entitled to enforce the agreement by way of a court action against the landlord if such default is not rectified. That being said, in some circumstances the tenant may be entitled to terminate the lease agreement.
Where the tenant is in default, the landlord can elect to cancel the lease agreement if the tenant persists in the default in spite of being given notice to rectify the default. In the latter event, the landlord may claim damages or enforce specific performance in addition to any other rights he may have out of breach committed by the tenant. A caveat to this is that if the breach is capable of remedy and the contract does not otherwise provide, the tenant is usually permitted a reasonable time in which to remedy the breach before enforcement of the contract becomes permissible by the landlord.

How To Properly Draft A Lease Termination Clause

A termination clause should be drafted as early as possible and should contain information on the following items: It should also cover who is obligated to prepare the termination documents, when the documents are to be delivered and to whom, both for the lessee’s benefit and for the lessor’s benefit. Termination clauses should have a broad termination right for the lessee (as opposed to for the lessor). These clauses also should have an expiration date in order to prevent a definition of a broad lease from calling for continuous periodic renewals, which results in the expiration date being extended by virtue of the failure to give notice in the future. In the event an option to purchase real property is exercised, it would be better to provide an alternative means of terminating the lease in the event the sale transaction does not close.

Common Pitfalls In Lease Termination Clauses

One common error landlords commit when drafting a lease termination clause is to be too vague. For instance, if the lease continuously runs until the tenant vacates the property, without specifying a specific termination date and related conditions, the clause will likely lack the legal effect of immediately terminating the agreement, resulting in the tenant remaining in the premises.
A similar error is when the clause does not set a specific event after which the lease is considered over, i.e., if the lessor has the option to terminate the lease upon sixty days’ notice after the tenant fails to pay rent for one month, while the tenant has not paid rent during that month, the termination needs to clearly state that upon the failure to pay rent for a set number of months, the lease will automatically terminate within the following sixty days . If the intention is not clear, this may lead to numerous legal disputes, even after the landlord has filed for eviction.
Another common mistake is not giving the tenant reasonable time to remedy the problem, i.e., if the tenant breached the contract and the lessor allowed them some time to remedy the problem, the landlord must continue drafting a legal document when the time is up to truly make the termination effective. Failure to do so could result in disputes over the notice period and any related damages. It is therefore important to understand the applicable laws and how they work when including such clauses.

Tips For Negotiating Lease Termination Clauses (For Both Tenants & Landlords)

In commercial leasing, both tenants and landlords can benefit from understanding the nuances of lease termination clauses. Tenants should seek termination terms that allow them the flexibility to pursue other opportunities without incurring major costs and operational disruptions when their business is growing or at an end. Landlords, on the other hand, should seek termination terms that allow them to regain control of the leased property if the tenant is in breach of its lease obligations.
When negotiating termination provisions in a lease agreement, tenants are advised to consider a variety of approaches, including provisions that: (a) tie a tenant’s right to terminate to a specific date (such as the fifth or seventh anniversary of a twelve year lease term); (b) give a tenant the right to terminate upon the occurrence of certain events (such as the tenant’s right to terminate if the leased property is not substantially complete within a certain number of months after the contract closing date); and (c) grant to a tenant a shorter term with one or more one-year renewal options.
Landlords may be able to structure economically favorable deals by agreeing to not exercise their right to terminate unless and until the tenant is in default of its lease terms and conditions. In assessing tenant default, a landlord may choose to defer enforcement of its default remedies under the lease agreement as long as the tenant is making a good faith effort to cure the default.
As noted above, landlords also may want to consider structuring termination clauses that give them the option to terminate the lease if the tenant is in default. Depending on the lease terms, landlords may choose to: (a) give the tenant the opportunity to cure a default prior to termination; (b) charge the tenant a termination fee; (c) forego claiming certain defaults; and/or (d) forbear a legal action to enforce certain remedies. To assess the impact of these provisions, the property’s fair market value and the costs associated with a new lease should be taken into consideration.

Case Studies: Terminating A Lease

Case Study # 1: Vacant Space in New York City
In this case, a large tenant vacated its premises in Manhattan early due to a merger with another firm. The termination clause in the lease allowed the landlord to terminate the lease on notice and charge an early termination fee. Landlord accepted rent and refused to agree to any further amendments of the lease or to what was going to be allowed in the vacant space. With little left for the tenant to do other than to remain in possession, the tenant knew it had to pay the damages after the end of the term. It paid the damages and filed an Article 78 action to get a judgment confirming that the tenant had the ability to get out of the lease at the end of the term and to have the landlord relinquish possession of the space. Tenant ultimately lost in the case because the lease provided that any lease amendment must be in writing and signed by both parties.
Case Study #2: Special Use Permitted
In a case involving the lease of approximately 200 acres of vacant land in upstate New York , the termination clause allowed the tenant to early terminate the lease if it did not receive its special use permit from the DEC. The tenant did not receive its special use permit and early terminated the lease. The landlord claimed that the special use permit was written in such a manner that it was not a real barrier to the tenant leasing the property. Tenant vacated the premises and the landlord adjusted the lease for the next tenant with additional concessions. Existing case law held that special use permits were not a real barrier to the use and lease of a property, but no case specifically held that a special use permit was not a real barrier to the leasing of a property. As a result, the tenant terminated the lease and vacated, and the parties settled on a more favorable lease for the tenant than in the original lease.