OFFICE LEASE PRE-TERMINATION

karen36083
3 days ago
2 min read

Client: Hi Juan, we’re about to lease an office in an older building. The lessor insists on a “guaranteed lease” — meaning we’ll still be liable for the entire unexpired term if we pre-terminate. Is that standard practice?

JPRE: May I ask — is the lessor a major developer (publicly listed, managing an entire tower), or just a small owner with one or two units?

Client: Small player, just owns the unit.

JPRE: Got it. In my experience, the big developers — like [PUBLICLY LISTED COMPANY] — almost always insist on guaranteed terms. Their leases are highly structured and tied to predictable cash flow. If a tenant pre-terminates, rent is still due for the balance of the contract. They can enforce that because their spaces are prime and demand is strong.

For smaller, individual landlords, there’s usually more room to negotiate.

Client: So what’s a reasonable penalty in that case? How many months?

JPRE: From what I could gather from the internet, office lease break fees usually land in the 6–12 months’ rent range (Singapore, Hong Kong, Europe, Australia). That reflects downtime, re-leasing costs, and broker commissions.

But I think you could negotiate this down. Or if the lessor refuses, suggest a tiered schedule: for example, if you terminate in Year 2, you pay 6 months’ penalty; in Year 3, maybe 3–4 months; in Year 4, just 1–2 months. It’s a way to balance lessor protection with tenant flexibility.

Client: Why not just sign a shorter lease, like 2 years, to avoid that risk?

JPRE: You could — but it could backfire. Lessor may offset the risk with higher starting rents and steeper escalations. On the tenant’s side, relocating is costly and disruptive, so longer lease periods can actually work in your favor. For example, a 5-year lease with lower base rent and a fair pre-termination clause often proves more cost-efficient than a 2-year lease with a high opening rent, aggressive escalations, and high pre-termination penalties, especially when you’re planning for stable, predictable cash flow.