The Concept of a Termination Clause
A lease agreement is a very important document that creates binding obligations on both landlord and tenant. Breaking a lease agreement early or renegotiating it can be a very cumbersome exercise between two people who have already committed to a particular term of occupation. Lease agreements are often of a fixed duration which is sometimes referred to as the "term". A practice that has developed in negotiating leases in recent years is the inclusion of termination clauses which allow for the re-negotiation of a lease agreement at some stage during the term.
A lease termination clause allows the tenant and/or the landlord to "break" the lease agreement during the term after a set period has expired, on notice to the other party. The period of notice is agreed between the parties and the tenant would normally have to cater for such lease termination in their own lease so that they are able to give the notice on the date that the clause allows (or thereafter). The period of notice varies, but 3 months is a common period . After the agreed period, the parties can negotiate, without any obligation to renew or continue in a new term. If they are unable to agree, then the lease carries on until the expiry of the full lease term. In addition to regulating the tenant’s ability to "break" a lease early, landlords also use the clause to protect themselves from situations where they are not able to lease the premises to a tenant that has renegotiated with them to extend the initial term.
It is important to ensure that the termination clause is carefully drafted as it could be interpreted to your disadvantage if it is not. The agreement is interpreted on the basis of the agreed text and therefore if the wording of the agreement is unambiguous, the parties will be bound by it. So, for example, an agreement stating that notice of termination must be given "by the end of the 5th month of the initial term" may be ambiguous as to whether the agreement expires at the end of the 5th month or whether the parties have to provide notice within the 5th month.
Types of Termination Clauses
There are a number of termination clauses which you may come across and which may affect the lease agreement in question, including:
Fixed term lease termination
This type of lease comes to an end at the prescribed time period agreed upon by the parties. This termination right does not apply where a renewal of the lease has been agreed to by the parties. Nor does this right apply where the landlord contracts out of the provisions of the CPA, other than a judicial contract out, where it is explicitly stated that the tenant is waiving the benefit of sect 28 or 29 of the CPA, and, where the parties are subject to section 14 of the LOA. If there is an extension of the term of the contract, without the same being agreed to, then the tenant has the right to continue for the same period under the previous contract.
Early termination/Break clause
The parties may agree that a lease may be terminated before expiry, on a particular date, or on a particular event (like the sale of the property, the tenant going bankrupt, etc.).
Periodic lease termination
The periodic lease may be terminated by either party giving the other party written notice, to end the lease on the set period that was agreed to.
Large scale lease termination
The tenant of a large scale lease is entitled to a notice of repeal of the lease at least one year before the lease falls due to expire, unless the section 54ZA notice is given before the commencement of the lease. Where a long lease is concerned, the tenant is entitled to a notice of repeal at least two years before the expiry of the lease period.
A large scale lease is defined as:
"A long-term lease with a duration longer than ten years; or a lease that, unless otherwise terminated, is likely to endure for a period of 9 years or longer."
Legal Consequences of a Lease Termination
While termination clauses are a useful tool for landlords and tenants to manage their relationship and affairs, their invocation may have legal consequences. The relationship between the parties remains contractual, regardless of what outcome either party might desire.
A consideration for the person invoking a termination clause is whether a penalty for breach of the contract will be seen as a liability. For example, if a landlord terminates a lease early under a termination clause, and it is found the termination was improper, then requiring the landlord to pay a penalty equivalent to the remaining rent is potentially ensconced within the definition of a penalty since it constitutes a liability for the landlord.
However, if the term also provides damages such as interest, costs, and/or other liquidated damages for delayed or improper early termination, such damages may not constitute a penalty. A penalty is characterized as a sum that is imposed, either for a particular breach, or generally for any breach of the same contract, by way of punishment (the phrase "a sum made payable as a punishment, whether or not in the form of liquidated damages") and not by way of genuine pre-estimate of damages (the phrase "a sum made payable as to the assessment of damages") (Fat Land v Furie Investment Partners Pty Ltd (No 2) [2019] NSWSC 85).
With respect to the tenant, there are two separate issues to consider: First, the tenant must consider whether the landlord has the right to terminate the lease and realize the deposit. Furthermore, tenants should note the specific actions listed in and required of the landlord in order to have a right to terminate. Any termination that is not done according to the termination provision in the lease will be ineffective and expose the landlord to claims for damages for breach of contract and/or a disorderly breach of the peace. Upon realizing the deposit, the landlord must also consider both whether the tenant has given notice of dispute (for security deposits) or the circumstances under which they are entitled to return the deposit (for rent arrears).
Second, the tenant must consider whether the lease agreement in question contains a leasehold interest, which is a valuable interest in land under s 191(2) of the Property Law Act 1967 (WA) such that it cannot be terminated otherwise than in accordance with that statute, and/or whether their rights have been breached in a way that warrants an injunction from the Title’s Office under s 5 of the Land Administration Act 1997 (WA). This terminology is not used in commercial leases but the relationship between the landlord and the tenant may warrant such a claim being raised, particularly where one or more of the purposes of the tenancy are exercising a right of attaching improvements or pasture under s 100 of the Land Administration Act 1997 (WA) or making or storing improvements on land for the purpose of feeding sheep or cattle generally during any drought, partial drought, or at any other time of shortage of pasture or forage for stock under s 98(5) of the Land Administration Act 1997 (WA).
How to Legally End a Lease Agreement
Steps to legally terminate a lease agreement as per a termination clause
As set out above, the steps to be followed to legally terminate a lease agreement are as follows:
(i) Parties must appoint a meeting to discuss the necessary amendments to the agreement, or notice of termination as set out in the termination clause.
(ii) The tenant must vacate the premises at the end of the thirty days’ notice period but no later than the date agreed to by the parties.
(iii) The tenant must pay all amounts due and payable by way of rent and other payments as the tenant is obliged to do in terms of the lease agreement .
(iv) The tenant must vacate the premises and restore the premises to its original condition – as per the condition in which it was delivered or handed over to the tenant when the tenant first occupied the premises.
The procedures to follow will always depend on the circumstances but the aforementioned are the general steps to follow. This procedure is not significant if the tenant fails to do so and the landlord is entitled to bring an application to court if the tenant fails to do so.
Negotiating a Lease’s Termination Clause
Whether you are the tenant or the landlord, you want the terms of your Florida lease agreement to be fair and accommodating. If you are a tenant, this means that if something is wrong you can get out. If you are a landlord, this means that if something really goes wrong the tenant can’t just leave you with your property vacant, and if it’s bad enough, you should have recourse against the tenant.
When you, as a tenant, are negotiating the deal, you may or may not have the experience or negotiating power to convince your landlord to include a termination clause in your lease. So, how do you determine when asking for a termination clause is worth it?
Most examiners will advise you that before asking for a termination clause, do your research on the building and the landlord to determine if the property is well-constructed, and that the landlord is responsive to issues that tenants bring up during repairs or maintenance. Basically, you want to know if the landlord is someone with a reputation and history for good service. The thinking here is that if you have a landlord that is likely to keep your apartment well-insulated from outside noise, and that the neighbors are unlikely to disturb the peace, then you don’t need a termination clause because there is no reason you would need to terminate early.
On the other hand, you might consider asking for a termination clause if you are negotiating a lease with a landlord that is not likely to negotiate with you on the rest of the lease, or if the landlord has been known by some parties to construct a building in such a way as to agitate the tenants, like building at a high-density neighborhood with thin walls and no amenities. This is because if the landlord believes they have you bound to the lease, and can expect no negotiation about the terms, they will probably not agree to a termination clause that could let you cut out and leave them high and dry.
In the end, the best offense here is probably a good defense. If you hope to convince the landlord to include a termination clause in your contract, show them that you have done your due diligence, and that you understand the risks of operating in this new space and the risks involved to them as a landlord. If this means going out of your way to emphasize that you understand that if conditions in the building decline, you might have cause to terminate, then that is what you should do to convince your landlord that the clause is useful to you both. And if nothing else works, again, the best thing you can do for your own interests is be diligent, and demonstrate that your diligence comes not from any particular distrust of the landlord, but simply from a desire to make sure that the space is mutually beneficial.
Common Disagreements and Their Resolution
Disputes may arise around what constitutes a valid "Termination Events" and whether a party has complied with the notice provisions in the Lease Agreement, including complying with the 180-day notice period prior to submission of a Surrender Notice. Engaging one’s broker in a discussion with the landlord’s property manager prior to issuance of a formal Surrender Notice can often avoid disputes over the validity of a "Termination Event". The submitting party may want to ask the landlord’s property manager if there is any basis for the landlord disputing the existence of a "Termination Event".
Compliance with the notice provisions may also be disputed at a later date; thus, a close examination of the particular Lease and any historical dealings with regard to the Lease are important .
Resolving these disputes will very often be resolved through a Settlement or Mediated Agreement. Mediation allows for both parties to exchange information and proceed in good faith towards a resolution. Hopefully there is a positive relationship between the parties so that issues will be settled amicably.
As with the drafting of many commercial lease terms, ambiguity and differing interpretations of Lease termination provisions must be resolved with legal and intellectual counsel. A tenant should engage a lawyer to review the Lease Agreement and the particular circumstances of the lease termination as soon as a dispute occurs.