What is a Lease Release Agreement?
A release of lease agreement, or termination of lease, is a legally binding agreement to end a landlord/tenant relationship and extinguish any remaining legal obligations between the parties under their underlying lease agreement. By signing and delivering a release of any remaining lease obligations, a party will effectively free itself from liability under the expired or terminated lease agreement.
A lease agreement, as the name suggests, is an agreement to lease or rent property. The signing of a lease agreement obligates the parties to perform certain functions as dictated by the terms of the lease. For example, the tenant will be required to pay a set amount of money as rent for a specified period of time in exchange for the right to use and occupy the leased property. A landlord will be required under the lease agreement to allow the tenant to use and occupy the property for the set term without harassment or unlawful interruption.
In effect, the release of lease agreement is a mutual agreement to end the legal obligation of the parties reflected in the underlying lease agreement. Importantly , unless state law or the underlying lease agreement contain specific language that prohibits such a release, one party can effectively terminate the lease with a simple reservation of rights provision. Simply put, upon signing and delivery of an agreement to release any remaining lease obligations, a party will effectively free itself from liability under the expired or terminated lease agreement. A landlord/tenant relationship exists only for as long as permitted under the terms of the underlying lease agreement, and once those terms are fulfilled, the resulting relationship ceases to exist. This is the case even where the parties do not formalize a release of their remaining lease obligations.
A release of lease agreement will typically include the following elements:
Simply stated, a release agreement serves the purpose of terminating any remaining obligations of the parties under the terms of the expired lease agreement. In effect, a release agreement is an agreement to end the landlord/tenant relationship.
Why You May Want to Release a Lease
A release can often be a way of legally extinguishing the legal obligations in a lease on the occurrence of a given event or at some point in time. Situations that may require a release of a lease could include a mutual decision to terminate the lease between a landlord and a tenant, or perhaps the sale or assignment of a long term lease or of the real estate improvements constructed upon the leased premises which triggers this release. A release is usually obtained as part of a larger transaction involving the sale or assignment of the real estate improvements constructed on the leased premises and typically may involve the assignment of any unexpired terms, covenants, obligations and liabilities under the lease. This document can also involve a mutual decision of the lease parties to terminate the right to utilize the leased premises.
Key Aspects of a Lease Release Agreement
All releases of lease documents should include the following elements:
- Date – The release document must be dated the same date at which the two parties enter into the release of lease document.
- Signatures – The landlord and tenant must both sign the release document.
- Release terms – The release document should set out that the parties mutually agree to release each other from any and all future obligations that would arise under a lease agreement between them.
- Financial Settlement – Under a mutual release of lease document, the parties often settle for a specific amount which usually represents a financial concession granted from one party to the other.
Legal Implications
The legal implications associated with releasing a lease agreement are numerous and varied. From the perspective of landlord and tenant alike, the idea of letting a lease go is fraught with legal implications. Without careful consideration of the costs and potential risks, there could be ramifications for all parties involved. Below are some major legal considerations when it comes to release of lease.
Some leases require tenants to obtain the landlord’s written consent before assigning or subletting the premises. Such a clause is usually for the benefit of the landlord as it confers a right of consent. The concern most landlords have is that of credit worthiness of the new tenant. Landlords want to ensure that they are not taking on someone who is a poor risk or bad credit. If the lease prohibits an assignment or sublease without consent, the landlord must consent as a matter of contract. Nevertheless, it is important to note that the landlord is under no obligation to provide consent in the first place.
This type of clause generally enables a tenant to assign or sublet without the need for permission of the landlord. Usually, the landlord cannot refuse consent, but it can still refuse approval if there is a material adverse impact on the property, such as a change of use that may compromise its safety or value . Consent cannot be unreasonably withheld. Tenants prefer these clauses as it gives them great flexibility. It also serves as a form of security in the event of foreclosure, which means that the landlord will not tie the tenant down to a single lender. The clause, also known as a "no covenants clause", was first included in the UK Landlord and Tenant Act 1988. However, it has limited application as it is primarily reserved for residential tenancies.
CAUTION – whether the landlord’s consent is required depends on the wording of the lease agreement. If the lease requires consent, then the tenant must abide by that term otherwise the assignment of the lease may be invalid. Even if the clause states that consent cannot be unreasonably withheld, there may be a question of reasonableness in terms of whether the landlord should provide consent.
Even one year leases should be avoided at all costs. That is the minimum duration in terms of the California Civil Code. Anything shorter can be challenged by opposing counsel. After one year, there are statutory requirements that apply to commercial leases whereby the landlord must give the tenant 30 or even as much as 90 days’ notice before terminating its occupancy. Only a termination agreement can allow for earlier termination at will.
How to Draft a Lease Release Agreement
In most states, the steps to create a release of lease agreement involves the following:
- Identify the contract parties. A release of lease agreement is essentially a contract between the lessor and the lessee. As such, you will want to name the specific party to the lease agreement that is agreeing to the release. If there are more than one party, you should name each party. Both parties should have executed the release.
- Clearly identify the specific obligations to be terminated. You will want to include the name of the lease agreement to be terminated and make clear exactly which obligations under the lease you are releasing.
- For what and for how long is the lease being released. Be specific as to both the duration of the release and the specific subject matter to be released. It’s wise to also specifically state that once the lease agreement is terminated, that all obligations are also terminated.
- Method of release. Be sure to include any additional methods of release that might occur under the lease such as receipt of payment for damages, or estoppel certificates.
- Counterpart provisions. A lease agreement may include provisions for counterparts although they are not required.
- Necessity of obtaining any third party consents. Be sure to obtain any consents from third parties that might be required in order to fully, permanently release the lease.
It is generally advisable to consult with a skilled attorney experienced in real estate leases before drafting and executing a release of lease agreement.
Mistakes to Avoid
As is the case with any legal document or matter, there are numerous mistakes that parties can make when releasing a lease agreement. One of the most common mistakes is simply ignoring the financial implications. Any lease agreement that ended should be reviewed by a qualified accountant. The accountant will look at your financials and help you determine your total rental loss. Any released claims from a lease agreement will relate directly back to money. Assuming you have already sent an end of tenancy letter (or moved on to abandoning a lease), you will want to let a lawyer or accountant determine if any release will be appropriate.
Another common mistake is when parties don’t deliver the release to all parties properly. This is an obvious no-no. If you have agreed to release a lease agreement, you need to make sure that all parties are in agreement. Many people don’t realize that these releases are legal documents. The landlord or even the tenant may have to notarize the document . If you have not notated who signed what (and how) there could be an opportunity for fraud, such as a retraction later down the line. It is important to make sure that the document is properly shared with the other party. Otherwise, you’re opening yourself up for pain down the road when you try to enforce the agreement.
The last mistake that I’ll mention is inadvertently accepting continuing liability for things that were covered under the lease agreement. When you move out of a commercial lease agreement and a separate business takes over your lease obligations, you might think that you’ve just done away with all your future financial liability. However, it can be very easy to sign continuity agreements that open you back up to liability for all lease obligations. Be careful and examine everything. You need to make sure that the new tenant understands that these are new lease agreements. You are no longer responsible for the lease agreement unless that is something that you specifically negotiate.
