Specify ‘Ongoing’ Right to Terminate Tenant’s Lease
Your lease will specify under what circumstances you and the tenant may terminate the lease. It'll also spell out the procedure you must follow to do so—for example, by giving 30, 60, or 90 days' written notice. If the provisions in your lease that govern termination rights are drafted ambiguously, you may be left with a more limited right to get out of the deal than you intended. For example, you might intend to give yourself an ongoing termination right when certain events take place, such as the tenant failing to pay common area maintenance fees. But if your lease language doesn't make that clear, you may miss that chance to terminate, or try to terminate the lease late and face a lawsuit from the tenant claiming that by doing so, you breached the agreement.
That's why it's critical to carefully word the termination provisions so that you aren't locked into terminating the lease on a specific day or during a specific period of time. And don't inadvertently give your tenant broad termination rights without also reserving them for yourself. Draft your lease so that it protects your interests throughout the lease and doesn't give you just a one-time right to terminate if things don't go well with your tenant.
Owner Locked into One-Time Option
Consider a recent lease dispute between the owner of a shopping center and a large national retailer of arts and crafts materials. They signed a lease in 2001 in which an “ongoing cotenancy” requirement was especially important to the tenant.
The provision required the owner to lease the anchor store in the center to a regional or national tenant meeting certain requirements. If the owner didn't maintain such an anchor tenant, the lease allowed the tenant to pay reduced “alternative rent.” The owner initially satisfied the ongoing cotenancy requirement by entering into a lease with a large supermarket as the anchor tenant. But the supermarket later closed, and the owner failed to find another anchor tenant. Meanwhile, the tenant continuously paid the alternative rent from the time the supermarket closed. The lease provided the tenant a continuing right to terminate if the ongoing cotenancy requirement was not met for six months or more, by giving the owner 60 days' written notice.
However, the lease also provided the owner with a right to terminate the lease in the event that it failed to satisfy the ongoing cotenancy requirement. It stated: “Landlord shall likewise have a right to terminate this Lease at the end of the twelfth (12th) month following the initial nonsatisfaction of the Co-tenancy Requirement by giving sixty (60) days prior written notice to Tenant of the termination.”
When the owner tried to terminate its lease with the tenant several months after the 12 months were up, the tenant claimed that it didn't have the right to do so —that it missed its chance to terminate at the 12-month mark. The owner disputed the meaning of the provision. The tenant argued that it gave the owner a “one-time option, at a fixed point in time, to terminate the lease in the event it fails to satisfy the On-Going Co-Tenancy Requirement.” The owner said its right to terminate was continuing, the same as the tenant's.
The owner asked a trial court for a judgment in its favor without a trial, saying that it intended the lease terms to give it an ongoing, not a one-time, right to terminate the lease. It said that the lease terms were ambiguous and it wanted to reform the contract as a result to reflect its original intention. The trial court disagreed. It noted that the terms of the lease were totally unambiguous, and determined that the owner didn't have the right to termination.
Court's Reasoning
The court pointed out that the main issue was whether the owner properly exercised its termination rights. “The sole issue is whether the lease provides the owner with a continuing right to terminate the lease upon the nonsatisfaction of the co-tenancy requirement for twelve months, or rather a one-time option to terminate exercisable only at the end of the twelfth month following initial nonsatisfaction of the co-tenancy requirement,” the trial court clarified.
The section of the lease addressing the owner's right to terminate followed immediately after the provision granting the tenant the right to terminate after six months of nonsatisfaction and “for so long as such nonsatisfaction shall continue.”
The owner claimed that by using the word “likewise” in the sentence providing it with its termination right, the section clearly applied the same procedure to both the tenant's and owner's termination rights—with the only difference being that the tenant could terminate after six months and the owner had to wait 12 months. That is, although the owner had to wait 12 months to exercise its right, once it reached the 12-month mark, the right became continuous and could be exercised at any time after.
The tenant pointed out that the parties used language granting the tenant an ongoing right to terminate by using “and for so long as such non-satisfaction shall continue,” but did not use the same language with respect to the owner's right to terminate. This, it argued, showed that the parties knew how to grant a continuing option but chose not to do so with respect to the owner. The trial court agreed and pointed out that the owner was really asking it to impermissibly alter the plain language of the contract by replacing “at the end of the twelfth month” with “at any time after the twelfth month.” The tenant argued that the use of the word “at” rather than “after” was a deliberate decision.
The court found that the provision granted the owner a one-time option to terminate at the end of the twelfth month following nonsatisfaction of the cotenancy requirement—but it didn't exercise its right to terminate in time and was barred from doing so later when it found a viable replacement tenant.
“The fact that the parties used language granting a continuing option in the tenant's termination provision and did not use that same language in the owner's option to terminate is convincing evidence that the owner does not have an ongoing option,” concluded the trial court. It said that the inference was that the parties considered whether to grant the owner an ongoing right to terminate but ultimately decided to limit that right to the tenant [Regency Realty Group, Inc. v. Michaels Stores, Inc., March 2012].
Pay Attention to Every Word
In this case, the owner unsuccessfully asked the court to alter the plain language of the contract by changing “at the end of the twelfth month” to “after the end of the twelfth month.” The case came down to one word, demonstrating how crucial it is for you to pay attention to the exact language you use in your leases. Here, as in many cases, the court wouldn't change the wording of the lease. Don't count on a court allowing you to essentially rewrite your lease because you weren't vigilant about the terms you used in the first place. Err on the side of getting an ongoing right, rather than being restricted to having only one chance to change your position if, like the owner here, you aren't able to hold up your end of the bargain.
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