We are evaluating an Office space for sale with an existing tenant in place. Tenant signed a 5-yr lease with one 5-yr option to extend and right now, they are in the first year of lease. Tenant is a national franchise chain and they are doing well nation wide. We want to make sure tenant doesn't break the lease. Right now the lease agreement says they can break the lease with 2-month rent payment.
Generally for retail spaces, we would consider tenants Sales volume, P&L to access the viability of tenant's business. This Office tenant may not be open give these details to us.
What due diligence can we check with this tenant? Any suggestions?
That's a very generous termination clause. What type of business is it? Can they easily pack up and re-locate?
Agreed! That's a very strange clause to have in a lease, does it require long notice period at least? Do they forfeit their security deposit? If it's a national tenant you have to just gamble sounds like, though there is some comfort in having a national name. Is it a franchisee or an actual national tenant?
Yes, this is generous termination clause that I would never agree to :) Lease says 3-month notice and 2-month rent for early termination. Lease is signed by national tenant and they offer wealth management and financial adviser services.
It was a mistake on the seller to give such crappy terms to execute the lease for the tenant.
In these situations typically I make the seller pay for their mistakes by giving a large credit at closing to mitigate the risk factor of terminating in such a short notice.
The tenant with signed lease in place is not going to change anything without putting a large carrot in front of them to motivate them to amend the lease.
You do not want to to give something to just fix the sellers mistake. The seller should pay for that. Now if the tenant is paying some crazy rate per sq ft below market such as 10 and market is 18 then it could be a benefit for them to leave and not renew the lease.
OP copy and paste the Termination Clause into a reply. There is most likely more details than provided.
Here is a very common scenario (not legal language) for office leases:
One time T Termination Options are commonly provided by LL's on 5 year deals AFTER the 3rd year of tenancy. T termination fees include all unamortized TI's, legal fees and commissions and "maybe" rent penalties. T shall give LL six (6) months written notice. Etc, etc, etc
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