Give Narrow Termination Option to Tenant Needing Loan

As finding good tenants becomes increasingly difficult, owners will want to lock down good prospects as quickly as possible. But what happens when an otherwise excellent prospective tenant wants to sign the lease, but can't commit until it knows whether its financing has been approved?

Time kills deals, says New Jersey attorney Marc L. Ripp, and if you are like most owners, you want to close the deal as soon as possible. The solution: Rather than waiting to see whether the tenant will get financing, go ahead and sign the deal, but give the tenant a limited right to cancel it.

This approach makes the deal subject to restricted right of termination. However, you must be careful that the tenant doesn't use this right to unscrupulously terminate the lease, says Ripp. You don't want to give the tenant the right to terminate the lease for any reason; you want to give it the right to terminate the lease only if it doesn't obtain the financing.

Draft Air-Tight Termination Option Clause

If a prospective tenant must wait for financing, but is otherwise ready to sign the lease, add a termination option to the lease. In this issue, we give you a Model Lease Clause: Grant Termination Option to Tenant Awaiting Financing. Like our Model Lease Clause, your lease clause should:

• Require the tenant to make the loan application immediately if it hasn't already done so, and to seek the application in good faith. Also, make sure the tenant names in the lease the lender that it plans to seek financing from and that the lender identified gives the types of loans that the tenant needs to finance its business venture.

  For example, if a tenant is opening a Laundromat, but applies to a lender that historically never grants these types of loans, don't let the tenant use the right to terminate based on the denial of a loan [Clause, par. 1].

• Cap the loan amount that the tenant is applying for. You want to make sure that the loan is for the amount that the tenant really needs. You don't want the tenant applying for an amount that will ensure rejection, just so it can take advantage of its right to cancel [Clause, par. 1].

• Require the tenant to properly fill out and sign all of the documents required by the lender. Without this provision, tenants could deliberately sabotage their loans, to trigger the right to terminate, by not completing the necessary forms or by filling them out incorrectly [Clause, par. 2].

• Require the tenant to agree to pay all application fees, points, and other costs associated with the loan, and to agree that any noncompliance will eliminate the right to terminate.

  For example, if you discover that the tenant's loan was rejected because the tenant didn't pay the points, the right to terminate the lease will not be available [Clause, par. 3].

• Require the tenant that wants to exercise the option to get an absolute, unconditional loan rejection letter from the lender and deliver it to you within 30 days after the lease is signed, along with a notice terminating the lease. If, on the 31st day, you don't have possession of the unconditional loan rejection letter, the deal cannot be cancelled [Clause, par. 4].

• State that if the tenant violates the lease or any of the previously listed provisions during the 30-day period, the right to terminate is not available [Clause, par. 5].

Insider Source

Marc L. Ripp, Esq.: Sr. Assoc. General Counsel, Mack-Cali Realty Corp.; Mack-Cali Centre II; 650 From Rd., Ste. 220; Paramus, NJ 07652-3517; (201) 967-0324; mripp@mack-cali.com.