CRE glossary
Termination option
A termination option is a contractual right that allows a tenant to end the lease before its natural expiration, in exchange for advance notice and a termination fee. Typical structures give the tenant the right to terminate at year 3, 5, or 7 of a longer lease, with the fee calculated as the unamortized landlord costs plus a few months of additional rent.
Termination options exist because tenants in long-term leases face real uncertainty: business growth, contraction, M&A, or changing space needs can make a lease that was right at signing wrong by year 3. The option gives the tenant flexibility at the cost of a termination fee.
The termination fee structure is the central negotiation. Common formula: unamortized TI allowance + unamortized free rent + unamortized broker commissions + 6 months of base rent at the time of termination.
Notice requirements matter as much as the fee. Standard notice is 9–12 months before the termination date. Tenants who don't give notice in time forfeit the option.
Example
- Lease term
- 10 years
- Termination right
- End of year 5
- TI amortized SL
- $220 / SF over 120 months
- Unamortized at year 5
- $110 / SF
- Plus 6 mo base rent
- $25 / SF
- Total fee
- $135 / SF
Broker perspective
Termination options are gold for tenants in fast-growing or volatile industries. Tech companies, agencies, and any business contemplating M&A should fight for one. The fee math should be unamortized landlord investment + 3–6 months base rent at termination.
Frequently asked
People also ask
When does a tenant negotiate this?
When term is 7+ years (otherwise the optionality isn't worth much), and when there's reasonable doubt about space needs in 5 years.
What does termination cost?
Unamortized landlord costs + 3–6 months base rent. On a 10-year office lease, often 12–18 months of effective rent.
Can the landlord also terminate?
Some leases have mutual termination options. Tenants resist landlord-only termination because it removes the lease's foundational protection.
What if I miss notice?
You lose the option for that termination date. Calendar 12 and 6 months out from notice deadline.
Related terms
Renewal option
Tenant's contractual right to extend the lease at predefined terms, usually exercised 9–12 months before expiration.
Free rent (abated rent)
A period at the start of the term where the tenant pays no base rent, used to offset move-in costs and competitive pricing.
Tenant improvements (TI / TIA)
Money the landlord contributes toward customizing the space for the tenant, usually expressed as $/SF.
See termination option extracted from a real lease.
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