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Where's the Door?

By John H. Lewis

A retail tenant negotiating a new lease should always consider its alternatives for exiting from the lease relationship in the event that circumstances change in the future. Projected sales may be off the charts, and the demographics of the location may seemingly hold the promise of decades of successful operations, but no one truly knows what the future may hold, and a wise tenant needs to anticipate alternative futures. This is not an illicit exercise borne of impure motives, but simply wise business planning that should benefit not only the tenant, but the landlord as well. A landlord will not be well-served by forcing a struggling tenant to remain in place, when other, more financially viable alternatives are available. The importance of planning well for exit strategies in new leases, and considering how the terms of existing leases affect exit strategies, is amplified exponentially during difficult economic times, as events of the last several months make clear.

Many lease provisions, and many outside factors, affect tenant exit strategies. This two-part article explores some ways in which operating covenants and exclusive use provisions, in particular, affect the ability of a tenant to exit from a lease relationship. Although some specific suggestions are made, the primary intent of this discussion is to alert the leasing practitioner to various issues and pitfalls which may be encountered.

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