In this difficult economic climate, disputes between landlords and tenants have become much more frequent.  Retail tenants are vacating stores, tenants of all kinds are asking for rent concessions, and many tenants are unable to pay the rent. 

Whether or not the dispute results in litigation, it is likely to be resolved through some form of settlement.  Before entering into the lease termination agreement or settlement agreement which settles the dispute or litigation, the landlord should think carefully about what should and shouldn’t be included in the final agreement.

Assuming the tenant does not have any valid claims against the landlord, in evaluating any possible settlement, the landlord will consider the following factors:

• The amount of rent  and other charges the tenant currently owes;
• The remaining term of the lease;
• The length of time it will take to relet the space; and
• The financial condition of the tenant.

However, in thinking about settlement, the landlord should also consider the impact of the release language contained in the settlement agreement or termination of lease agreement and the fact that it may release the tenant from significant future obligations.  A typical termination of lease agreement provides that all obligations of the landlord and tenant under the lease will cease effective as of the termination date.  A typical settlement agreement would provide for mutual releases of both parties from any and all obligations of any kind whether under the lease or outside of the lease.  However, most leases for a shopping center or a multi-tenant office or warehouse building provide that the tenant will pay estimated taxes, operating expenses and/or common area charges during the year with a year end reconciliation once the final actual charges for the year are determined.  If the landlord suspects that the tenant has significantly underpaid these estimated charges and fails to factor them into his settlement evaluation, the standard language of the termination of lease agreement or settlement agreement may very well release the tenant from any obligation to make this payment.  Therefore, the landlord either needs to factor that into his settlement analysis or specifically except any year-end reconciliation amounts from the released obligations.  In most cases, it is preferable to try to get any anticipated reconciliation charges included in the overall final payment so that you do not need to chase the tenant later.

Other claims that the landlord should be careful about releasing are potential indemnification obligations which the tenant may have to the landlord.  For example, what if a customer or client of the tenant falls and injures himself within the tenant’s premises prior to the effective date of termination and then joins the landlord in a lawsuit subsequent to the date of termination.  Had the lease not been terminated, this potential claim would have been one against which the tenant would have been obligated to indemnify the landlord.  However, the typical release/termination language would likely release the tenant from this indemnification obligation.  It therefore might be advisable that the tenant only be released from claims, obligations or liabilities known to landlord and tenant at the time of termination or settlement.

In many cases, the landlord settling with a vacating or non-rent paying tenant may be happy to get whatever he can obtain in the way of settlement and these extra considerations may not be a factor.  However, if you are dealing with a tenant who has some financial wherewithal, these additional considerations should certainly be evaluated in crafting a settlement and should be covered in the final lease termination agreement or settlement agreement.