What follows are our general observations and opinions. It is not legal advice, it is not a definitive statement of California law, and every situation depends on its own facts.
Businesses sign ten-year leases for space they can only realistically forecast three years out. An early termination right is the clause that acknowledges this out loud, and in our experience it is the single most useful protection a growing or uncertain business can negotiate into a Los Angeles commercial lease. It is also routinely drafted in a way that gives the tenant far less than it thinks it bought.
The core point is this: an early termination fee does not buy a clean exit unless the clause says it does. Most termination provisions we review release the tenant from future rent only. Personal guarantees, indemnity obligations, restoration and removal duties, unamortised improvement allowances and brokerage commissions can all survive the termination and follow the tenant out of the building. Whether the right is worth exercising depends far more on that tail than on the headline fee.
How termination fees are actually priced
Landlords price a buyout to make themselves whole for the deal economics they gave up. Typically that means some combination of:
- Unamortised transaction costs — the tenant improvement allowance, free rent and leasing commissions, amortised over the term at a stated interest rate and repaid to the extent unearned.
- A rent component — commonly a stated number of months of then-current base rent plus estimated operating expenses.
- Sometimes a premium on top, which is pure negotiation and which we push back on hard.
The unamortised-costs component is where the money usually is, and it is worth checking the arithmetic rather than accepting the landlord’s schedule. We have seen amortisation run at interest rates well above anything the landlord actually paid, and we have seen commissions included that were never disclosed during negotiation. A clause that requires the landlord to provide a written, itemised calculation with supporting documentation, and that caps the interest rate, is a reasonable thing to ask for and is frequently agreed.
Notice, timing and the conditions attached
Early termination rights nearly always come with conditions, and each is a place the right can quietly evaporate:
The window. The right is usually exercisable only as of a specific date — the end of month 36, say — on notice given a set number of months in advance. Miss the notice date and the right is gone for the whole term, not merely deferred. As with a renewal option, the notice date belongs in the business’s own calendar system, not only in the lease file.
Payment as a condition precedent. Many clauses provide that the termination is not effective unless the fee is paid with the notice or by a stated date. A tenant that gives notice and then negotiates the fee amount may find it has given notice into a void.
No default at exercise. A tenant in default — including a technical default such as a late estoppel certificate or a lapsed insurance certificate — may be barred from exercising. This is a real risk, and it argues for tidying up compliance items several months before the notice date.
What survives the exit
This is the part we spend the most time on when reviewing a lease, because it is the part clients discover last.
Restoration and removal obligations are the usual surprise. If the lease requires the tenant to remove specialty improvements, cabling, or the supplemental HVAC unit it installed, and to restore the premises to a base condition, that cost lands on top of the termination fee. On heavily built-out space in Los Angeles it can exceed the fee. We ask for the landlord to designate at the time of construction which improvements must be removed at the end, rather than leaving it to the landlord’s discretion years later — that single change converts an unknown liability into a known one.
Personal guarantees are the other. A guarantor should confirm in writing that the guarantee terminates on a valid termination and payment, because a guarantee drafted to cover obligations “arising under the lease” can be read to survive. Our note on personal guarantees in a commercial lease goes into the structures worth negotiating, including burn-down and good-guy formulations that interact directly with an early exit.
Indemnity obligations for events occurring during occupancy almost always survive, and reasonably so. That is normal and not usually worth fighting.
If there is no termination right at all
Most leases do not contain one, and a tenant that needs to leave anyway has a different set of options. Assignment or subletting is the first place we look, and the consent standard in the lease governs how realistic it is — see our note on assignment and subletting provisions. A negotiated surrender is the second: landlords will sometimes take a lease back voluntarily when the space can be relet at a higher rent, and in a strong submarket that conversation is easier than tenants assume.
Simply walking away is the option we counsel against. Our reading of California law is that a landlord in that position has remedies including recovering damages measured by unpaid rent for the balance of the term, subject to the landlord’s own duty to act reasonably in mitigating its loss. The mitigation duty is real and it matters, but relying on it is a poor plan compared with negotiating an exit while there is still something to negotiate with.
Negotiating one in from the start
If you are signing a new lease now, a termination right is usually cheaper to obtain at the letter-of-intent stage than at lease drafting, because it is treated as a deal point rather than a legal one. Our note on what to negotiate in a letter of intent covers what belongs in that document and what tenants routinely leave out of it.
If you would like us to read a termination or buyout clause and tell you what exercising it would really cost, call (310) 556-9692. Commercial lease work is transactional, so we handle it on an hourly or flat-fee basis agreed in advance — not on a contingency.
Related reading: our commercial lease review overview, plus tenant improvement allowances and CAM charges in a California commercial lease.
Again, these are our general views and opinions rather than legal advice or a definitive statement of California law. Reading this page does not create an attorney-client relationship between you and our firm, and every matter turns on its own facts.
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