This Math Isn’t Math-ing: Whose Calculation Is Correct? Resolving a Lease Termination Payment Dispute

Key Takeaways

• Termination fee calculations must reflect the full lease context, not isolated clauses. Courts will look at all lease language and subsequent amendments to interpret termination payment formulas, including rent concessions, allowances, and changes to length of term.
• Careful drafting can prevent costly disputes. Landlords and tenants should draft early termination provisions, including termination fee calculations, defensively and with precision, anticipating how rent adjustments and lease amendments may affect termination payment math down the line.

A tenant in a commercial lease decided to exercise their early termination right under the lease agreement. But when it came time to pay the termination fee, the landlord and tenant couldn’t agree on the amount, and the difference was significant.

The lease had been amended to include rent concessions and a tenant allowance for improvements. If the tenant didn’t use its improvement allowance, a portion would automatically be applied as a rent abatement with the remainder of the allowance becoming unavailable to tenant. The tenant never used its improvement allowance, but did accept the resulting rent reduction.

When the tenant exercised its early termination option, the tenant calculated the termination payment based on its actual, reduced monthly rent per the lease amendment through the early termination date, which was the rent the tenant had been paying after the concessions and allowance conversion.

The landlord, however, calculated the termination fee based upon all monies that the tenant could have possibly recouped under its tenant improvement allowance and rent abatements through expiration of the entire lease term, not the early termination date. The landlord’s termination payment calculation was more than two times higher than what the tenant calculated.

The tenant paid the termination payment they believed they owed, based on the amended lease. The landlord then sued to invalidate the termination on the grounds that the tenant failed to comply with its obligations under the lease by not paying the correct (and higher) termination fee.

The dispute centered on how to interpret the termination fee formula in the lease amendment. The landlord argued that if you looked at just the termination payment clause by itself, it supported the higher amount.

But, as AGG Litigation and Retail senior associate Jordyn Simon and Litigation partner Rick Mitchell explained to the court, we don’t read contracts in pieces. We can’t cherry pick a few lines of a lease and overlook the rest.

When the court considered the termination payment formula in the context of the entire amended lease, including the rent concessions and reductions, the court agreed that the tenant’s lower termination payment amount was calculated correctly and paid per the lease.

Practical Steps for Tenants and Landlords

1. Draft defensively. When negotiating lease terms, think about how language could be misinterpreted or used against you later and aim to draft protectively
2. Context matters. Contract provisions don’t exist in isolation. Any clause must be read considering the entire agreement and all its amendments.
3. Reach out to Jordyn, Rick, or anyone on the AGG Retail team. If you’re facing a disagreement over lease interpretation, please contact Jordyn and our AGG team. We’re here to help.