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Contractual penalties of up to 210 pct of the rent are too high
CIT and the real estate investor

When can a lease contract be terminated and how can his be avoided

Szymon Łukasik
Cresa Polska

01 August 2017

When can a lease contract be terminated and how can his be avoided
Tenants have the upper hand in some shopping centres, but in most cases, particularly in successful retail schemes, they are in the weaker position when in conflict with their landlord. A retailer operating stores in several shopping centres recently asked us for advice as he sensed that there was some trouble ahead. He said that his shopping centre manager was keeping a close eye on everything he was doing as if looking for a reason to penalise him. The manager complained that the store had once opened a few minutes late or closed too early, that the staff took cigarette breaks or that there were fewer products on the shelves than in neighbouring boutiques. Despite making timely payments, the tenant had the feeling that the landlord wanted to get rid of him, either by not renewing the lease or by leasing his space to someone else. The best that a tenant can do is to do his/her best not to give the landlord any reason to exercise his rights as laid out in the lease agreement, including the right to terminale it.

First of all you should talk to the store staff right away to investigate the landlord’s complaints. It’s a good idea to have the staff properly instructed and made aware of all the tenant’s duties under the lease agreement – in addition to maintaining sales – and of the potential consequences of any failure in this regard. They should know the shopping centre rules and regulations well and be trained in its procedures.

How long it takes before a shopping centre owner orders a tenant to close his store depends on the specific lease provisions. That’s why it’s also reasonable to incorporate into the contract a requirement for notice of seven days or longer to be given requiring the tenant to desist from practices that might result in lease termination. In the absence of such a provision, the store could be forced to close at any time with a notice of termination resulting from the tenant’s mistakes if the landlord wanted to get rid of the tenant. The landlord may also charge contractual penalties until the tenant has vacated and restored the premises to their original condition.

The store won’t close overnight on the slightest pretext. The tenant will have more time to explore the issue or improve his performance to avoid contractual penalties, and will also have his rule breaches clearly spelt out in a written notice.

Charges that the tenant can find hard to refute may include: untidy premises, stock levels that are lower than those in neighbouring stores, complaints about the store staff, late openings or early closings, and too many breaks during the day when the store is temporarily closed. However trivial these may seem, they may be considered valid charges under a lease agreement or shopping centre rules and regulations, the latter usually being an integral part of the agreement.

The reasons for lease terminations are usually expressly set out in a lease agreement. For instance, if the contract says that the tenant is required to report all damage to the store and fails to do so – even if the cleaning staff have damaged the store front or entrance door – the landlord has the right to terminate the lease. Not because of the damage itself, but because of the tenant’s failure to take action.

Also, the owner of a retail centre always has the right to replace a tenant with a better one – from his perspective, of course – when the lease expires. That’s why it’s in the tenant’s best interest to incorporate a provision in the lease allowing the tenant to extend the lease, preferably on the same terms and conditions, in other words to maintain the lease relationship. This is a very convenient option, and if the tenant secures an option to extend his lease, the landlord may require the tenant to notify him at least six months before the lease expires of the intention to stay– this would be equivalent to a lease renewal. If the tenant fails to do so, the landlord will have a free hand and time to find another retailer.

When drafting a lease agreement, the tenant should make sure that it includes the tenant’s right of first refusal. This will guarantee that prior to the lease expiry the landlord will have to reoffer the premises to the same retailer first. To be honest, this is no guarantee that the lease will continue, but the tenant will have priority in renegotiating with the landlord.

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