Whether and how a Landlord (or tenant) may prematurely end a lease under certain conditions is a heavily negotiated provision between parties. Constraining a Landlord’s ability to exit a net lease is an important right called a Termination Clause in NNN leases; these clauses can be complex, and can make negotiations long and drawn out, impacting investment returns and significantly raising opportunity cost.
However some tenants make the net lease process easy. Investment grade, national tenants, such as Walgreen’s or 7-11, for example, set the bar by making their lease negotiation process a breeze for all parties. They negotiate quickly, with unambiguous clauses, and excellent implementation of their payment and upkeep promises. This leaves a net lease investor with nothing but a good taste in the mouth. Landlords and serious NNN investor need to consider these tenants first when prospecting for investment properties.
Typically, when taking advantage of an Early Termination (ET) clause, a triple net lease tenant is required to give notice of early termination of between six months to one and a half years, plus, pay an early termination fee, or ETF. This lump sum penalty payment helps offset a net lease landlord’s expenses to identify a new tenant. This ETF is lesser than the tenant’s entire rent obligation under the full term of the lease. An ET clause deserves very close attention, because often its language gives a NNN lease tenant the ability to end obligations prematurely, before the lease term is complete and thus impacts the Landlord’s cash flow risk in a net lease investment property. When and where possible, landlords and triple net lease investors should avoid investment leases with ET clauses.
Affiliated with an early termination clause is the Option to Extend clause. This language can extend the negotiated term, usually at the tenant’s option, close to the expiration of the initial NNN lease term. NNN leases often will contain multiple options to extend that could, in sum, total more than 20 years in time. Landlords must therefore word early termination clauses in a manner in which the tenant is pressured to exercise the option to extend if the tenant has prior been satisfactory and the tenant’s financial health is robust, and other potential tenants are not willing to pay rents that are at such fantastic premiums that the existing tenant becomes a shoddy choice in comparison. Mostly, a net lease tenant has to exercise the option to extend within a certain time, and in writing. (Also, often, options to extend are accompanied by rent bumps – a huge benefit for a landlord and investor!) A savvy net lease landlord must seek to contain the time needed by a tenant to extend to discourage lengthy negotiations.
Your expert brokers at the Triple Net Investment Group believe it is their paramount duty is to ensure that our clients understand the risks and rewards of termination clauses in each NNN lease investment, as part of standard due diligence, before the fact of investment, not after. Call today and find out how differently, successfully and diligently we will conduct business for you.
