Collect Rent from Small Tenant While Waiting for Larger, Ideal Tenant

September 13, 2017
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Owning a large retail or office building property can be lucrative. After all, if the rent rate is based on the square footage that a tenant rents, a vast space has the potential to pull in more money than a small one. But profiting from the sheer size of your property isn’t a given. To collect rent, you need a tenant, and if you can’t find one, you’ll have vacant space on your hands. If you’ve thought about what you can do with that space, consider renting to a smaller tenant—without giving up the search for a bigger tenant. Using a termination option can help you collect from a small tenant while you wait for a larger, ideal tenant.

You can sign the lease with the small tenant, but get the option to require it to terminate its lease, leaving you free to rent the space to a big tenant. Although tenants typically ask for a termination option—which is generally a bad idea for landlords—this specific type of termination option works in your favor. So demand it before renting to the small, potentially short-term tenant. Your termination option has to address the key issues that can go wrong, though, if they’re not specifically negotiated. Here are two protections to include:

Protection #1: Make tenant acknowledge your termination option. Make the tenant acknowledge in the lease that you’ve got an option to terminate the lease. That way, the tenant would have a hard time arguing that it didn’t understand you could terminate the lease. The termination should take effect on the “termination date”—which is a day that you select to terminate the lease. The termination date can occur at any point before the lease expires. But pick a termination date that occurs on the last day of a calendar month within the lease term or extension term so you’ll get the full month’s rent.

Protection #2: Give limited advance notice to tenant. Say in the lease that once you’ve set a termination date, you’ll alert the tenant to it by sending the tenant a written notice. You’ll need to send this notice some time in advance of the termination date. You and the tenant may need to negotiate how far in advance. You may want to give the tenant as little advance notice as possible—say, 30 days—but expect a tenant to want more time. For example, the tenant may want 90 or more days’ notice so that it has enough time to find new space and prepare to move.

For seven more protections and a Model Lease Clause that can help you draft a mutually beneficial termination option, see “Maximize Options for Collecting Rent from Large Space,” available to subscribers here