Kick-Out Clauses as Circuit Breakers – A Contrarian View

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Here at Ruminations, we often short-cut any deep thinking about proposed agreements or about provisions within those agreements when we see something we call a “circuit-breaker.” For example, we don’t drill down into rent damage clauses when a lease’s term is one year. After all, it takes time for a tenant to fail, and how much time will really be left on the lease after that date? The same goes for an agreement that allows either party to terminate it on 30 or 60 days’ notice for any reason or no reason at all. Why cogitate when a party can “kick-out” of an unfavorable agreement or relationship?

The ultimate circuit-breaker for either a landlord or a tenant is one that allows for a voluntary lease termination if sales fall below a certain, agreed-upon level. Though giving the other party the right to terminate a lease seems like an anathema, it could also be a reasonable compromise, one that obviates the need for convoluted negotiations over continuous operation issues, damage formulas, force majeure clauses, and so forth.

In the leasing marketplace, when it comes to “obligations,” it is the tenant that takes the risk. At the outset, it speculates that a particular location will prove to be successful. Some tenants, often described as “sophisticated,” do market research, grind numbers, and apply “expertise” before choosing a location. Less “sophisticated” ones primarily rely on “gut.” For each, however, “hope” may be the biggest factor in their site selection.

Landlords, on the other hand, rarely do any calculations when only one prospective tenant shows up for an empty store. It seems that the major criterion is whether the tenant is breathing long enough to sign a lease. Yes – yes, we know that this is a gross simplification and could be seen as an insult to landlords as a class, but (after lonely deliberation), we’ve written down that thought and will stand behind it. Landlords are pre-disposed NOT to turn away a tenant willing to pay their price and sign on the dotted line. [Query – when is the last time you saw a signature line that was dotted?]

Though it may be obvious, we’ll explain why each party would like a “kick-out” clause. After all, we’ve got space to fill and electrons are free.

Why pay rent and staff if a store is unprofitable and forecasts predict no relief? It doesn’t matter whether the failure came from initial poor site selection or a deteriorating change in market conditions from when the store first opened. Those conditions could have come about because of demographic changes or changes in market taste for the tenant’s goods or services. So, if a store doesn’t work out, a tenant would prefer to cut its losses, not be forced to run a store solely for a landlord’s (and a landlord-lender’s) benefit.

Landlords can also have a legitimate concern about an underperforming tenant, especially in a shopping center. They might want to replace such a tenant with one expected to bring more revenue and foot traffic to the center.

We realize that our support for more leases with kick-out clauses will raise the hackles of nearly all of our readers. But, Ruminations are just that: Ruminations. They aren’t intended to persuade others, only to encourage more Ruminating on the part of others. Indeed, if we were a landlord (even without a lender hovering over our shoulders), we’d be pretty resistant to give in to a tenant’s request for such a kick-out. In a word, agreeing that a tenant could bail out early threatens stability. As a tenant, what might be seen as “unsuccessful” in the eyes of the landlord when it comes to the overall health of its shopping center, could be “successful” in my eyes.

So, we’re not sanguine that our support for more leases with kick-out clauses will influence any reader.

That, however, is not the end of our Ruminating. Not every problem-solving “cure” needs to apply broadly. Yes, aspirin or its more “modern” competing pain relievers can “solve” a lot of different headaches, but there are tons of medications aimed at very narrow illnesses. In that vein, our Ruminating has led to a realization that the “kick-out” clause, applied judiciously, could be the way to make a deal that might otherwise not be makeable. In fact, landlords could offer such an option to get a deal done. And, in today’s weak retail (and office) leasing environments, that might be just enough to get a space filled, a way to ameliorate risk, be it the landlord’s or the tenant’s. For sure, lenders don’t like leases that could “expire early,” but they also don’t like unleased spaces. Welcome to the next normal.

[By reason of a calendar conflict, we won’t be posting next week’s Ruminations blog until early Monday morning.]



  1. That’s it?

    No other thoughts on this subject to inspire further rumination by your readers this week?

  2. In the office world, tenants often use the threat of exercising a termination option to renegotiate a lower rent. I realize that is less applicable to a retail lease, but it is one of the many reasons why they are disfavored by landlords.

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