Include 6 Key Points in Your Rent Acceleration Clause with Strong Tenants

A “rent acceleration” clause is a powerful lease protection that just about any landlord wants to have. Such a clause gives you the right to require the tenant to pay the rent for the rest of the term immediately if it commits a default that results in termination of the lease. In addition to making tenants less likely to default on their lease obligations, rent acceleration compensates you for the losses you could suffer by not having a tenant in that space.

Of course, the same things that make rent acceleration appealing to landlords make it anathema to tenants. Accordingly, landlords may have a tough time including an acceleration clause in the lease of a strong tenant.

But it doesn’t have to be an all-or-nothing proposition. Attorneys suggest that tenants with significant negotiating leverage may be amenable to rent acceleration if the clause is fairer and more balanced than the one-sided provisions that landlords often command when dealing with weaker tenants. Specifically, there are six key things you can include to make a rent acceleration clause more palatable to a tenant without significantly diminishing the protection it affords you.

1. Provide for Acceleration of Rent at Discounted Value

While it should give you the right to collect accelerated rent if the tenant defaults, the clause should also stipulate that the rent amount will be “discounted to present value.” Explanation: A fixed sum of money is worth more when it’s paid upfront than it is when it’s paid over a period of time. Thus, $1,000 paid today is worth more than $100 per month paid over a 10-month period. So, a tenant may be more willing to concede an acceleration right if the landlord agrees to “discount”—that is, reduce, any accelerated amount to reflect the present value of the future accelerated rent payments [Clause, par. a].

2. Provide for Determining Present Value Discount Amount

The lease clause must specify an appropriate interest rate, or “discount rate,” to be used in calculating the present value discount. Selecting a discount rate is a business issue subject to negotiation with tenants typically seeking the highest and landlords the lowest rate possible. The New York attorney who drafted our Model Lease Clause suggests using one of two alternatives:

• A fixed rate agreed to by both parties; or
• A rate tied to an index.

A mutually agreed upon rate that’s fixed when the lease is signed may be out of line with interest rates at the time of the tenant’s default. That’s why the New York attorney prefers a rate pegged to an index. Our Model Lease Clause follows the index model using the yield of actively traded U.S. Treasury bonds with 10-year maturities. This index favors landlords because U.S. Treasury bonds are a very conservative, safe investment with a relatively low rate of return. The tenant may negotiate for an index that will provide a higher discount, such as the prime rate of a designated bank that makes loans to commercial landlords [Clause, par. c].

3. Include Both Base Rent and Additional Rent in Accelerated Rent Amount

While the present value discount represents a landlord concession, this provision is a tenant give-back. Specifically, spell out that the tenant must pay accelerated rent consisting of both annual base rent and annual additional rent that would have been payable over the balance of the lease term from the default date to the lease’s original expiration date [Clause, par. b]. (Note: Because a strong tenant may not agree to including annual additional rent in accelerated rent, we’ve marked the provisions of the Model Lease Clause addressing additional rent as “optional.”)

4. Provide for Calculation of Additional Rent

Unlike annual base rent, which is typically set out in the lease, annual additional rent is an unknown amount. You generally have to estimate a tenant’s share of additional rent at the beginning of a year since you won’t know actual costs until the year ends. The New York attorney suggests using past additional rent to estimate the annual additional rent to be accelerated.

For example, compute the annual additional rent the tenant paid in the 12-month period preceding the lease’s termination. If the lease hasn’t yet run a full 12 months, multiply the average monthly additional rent payable since the start of the lease by 12 [Clause, par. c].

Once you determine the annual amount, use it to calculate how much additional rent would have been payable from the default date to the lease’s original expiration date had the default not occurred.

5. Provide for “Fair and Reasonable Rental Value” Deduction

Another concession you might have to make to get a strong tenant to accept an acceleration clause is agreeing to deduct a specific amount from the accelerated rent due. The justification for the deduction is the fact that you’ll be able to relet the space after the defaulting tenant moves out. Accordingly, the clause should state that you’ll deduct from the accelerated rent the “fair and reasonable rental value” of the space for the balance of the lease term. This way, the accelerated rent amount will more accurately reflect the damages you’re likely to suffer as a result of the default [Clause, par. b(ii)].

6. Provide for Determination of “Fair and Reasonable Rental Value”

The next step is to explain how “fair and reasonable rental value” will be determined. The New York attorney recommends that landlords establish the right to make this calculation on their own, in good faith, and in accordance with certain principles. Suggestion: State that rental value will be based on rents payable under leases for comparable space during the 12-month period immediately preceding the rent acceleration date. Landlords that charge lower rents should specifically limit the comparator to leases for comparable space in their own building, shopping center, or facility, rather than those in properties nearby where tenants pay higher rents for comparable space.

The clause should also spell out that if the space is relet before the accelerated rent amount is finally determined, the rent under the new lease will be considered the fair and reasonable rental value for the purposes of calculating the accelerated rent deduction. This formulation gives you more control since you’ll be negotiating the new rent with the business that relets the space. For that reason, the tenant may insist on language that bars you from charging less than your going rental rate when reletting their space after a default [Clause, par. b].

Two Accelerated Rent Concessions Not to Make

The point of this analysis is to show you how to make reasonable concessions to get a strong tenant to accept a rent acceleration clause that affords you ample protection in the event of a lease default. But the tenant may make seek to water down your acceleration rights even more. While every deal is different, attorneys caution against two kinds of concessions you should try to avoid.

Don’t agree to total post-acceleration release. Having paid accelerated rent (and debts owed before the rent was accelerated), tenants may demand that they be released from any further liabilities under the lease. But the New York lawyer says that you should stand your ground and require the tenant to pay the costs you incurred as a result of the default. Insert language into the acceleration clause that makes the tenant responsible for your default-related costs after paying the accelerated rent, including but not limited to the costs of re-letting [Clause, pars. d and e].

Don’t agree to limit acceleration to rental payment defaults. The tenant may want to limit your acceleration rights to defaults for nonpayment of monthly rent. Accelerating rent for other defaults, whether monetary or nonmonetary, would be unfair and unduly harsh, the tenant may argue. An appropriate response: Rent won’t be accelerated unless the tenant commits a default that justifies terminating the lease. And if a default is serious enough to trigger lease termination, it’s serious enough to bring rent acceleration into play.