How to Write a Lease Termination Letter
Are you a tenant trying to terminate your lease without breaching a contract due to interruptions related to the Coronavirus (COVID-19) pandemic? Luckily, the Coronavirus pandemic has created a unique situation that is likely to be deemed by courts to be a force majeure (sometimes known as an act of God), and in consultation with a business attorney, frustration of purpose and commercial impracticability. These legal doctrines allows certain contracts to be terminated. Another affirmative defense to contract enforcement due to Coronavirus includes impossibility of performance.
However, walking away from a contract creates the uncertainty of whether the other party to the contract, such as a landlord, may file a lawsuit, send you to collections or damage your credit rating. To avoid this risk, it is best to obtain a written settlement agreement that the other party to the contract (e.g., the landlord) has released you in full from your obligations upon conditions deemed acceptable to them. Accordingly, the letter below has been drafted by Scott Talkov and Colleen Sparks at Talkov Law Corp., a law firm assisting clients with expertise as a real estate attorney in Riverside with a focus on commercial landlord-tenant disputes.
A few helpful tips to terminating a contract are as follows:
- Offer the other party any funds they already have on hand, such as a rental deposit, to make the offer more attractive. Chances are, you’ll never get your deposit back from the landlord, anyways.
- If this is a lease, consider moving out first and providing the landlord with pictures of the premises in good condition, which will make the offer more attractive.
- Offer an immediate turnover of the keys and possession if your proposal is accepted.
- If there were issues with the other party’s performance of the contract (e.g., a leaky roof), it may be wise to remind them of these issues.
- An offer of some amount of money (e.g., one month’s rent) may increase the chances that your offer is accepted.
- Specify exactly how issues beyond your control (e.g., Coronavirus (COVID-19) pandemic) have interrupted you or your business.
- If the party writing this letter lacks assets, provide some evidence or arguments to that effect to show the other party that a lawsuit would be a waste of time and money.
Free Lease Termination Letter
[Sender’s Address, Phone Number and Email]
VIA EMAIL ONLY
Phone: [Recipient’s Phone]
Facsimile: [Recipient’s Fax Number]
[Recipient’s Email Address]
Re: [e.g., Proposed Termination of Lease]
Property Address: [Property Address]
Tenant: [Tenant Name(s)]
Landlord: [Property Owner’s Name]
Dear [Mr/Ms.] [Property Manager/Property Owner/Other Party to Contract],
I hope this letter finds you well. Unfortunately, with regard to your lease with [name of tenant(s)], the State of Emergency following the Coronavirus pandemic and [governmental restrictions] in [name of county] County have made continued operations economic infeasible. Accordingly, this letter proposes terms that we suspect will be agreeable to the landlord to terminate the lease dated [date of lease] between [name of landlord] (“Landlord”) and [name of tenant] (the “Lease”), for the premises at [address of leased property] (the “Premises”).
Regretfully, the problems for [name of tenant] began immediately when the State of Emergency was declared by Gov. Gavin Newsom, which included stay at home orders effective March 19, 2020. This shuttered [name of tenant] by operation of law. In an effort to protect their employees and customers, effective the day before, [name of tenant] ceased its operations entirely. While many public leaders and business owners were optimistic at the time that the issues caused by this shutdown would be temporary, that is not what has occurred.
Unfortunately, since the Coronavirus pandemic began, the operations of [tenant], as reflected by its gross sales, have been a small fraction of what they were before the pandemic. Specifically, as shown in Exhibit 1 hereto, the sales from March 18 through [end date of calculation] were [specify small amount]. Thereafter, [the tenant] reopened for [limited operations, e.g., take-out] on [specify date]. However, this resulted in only about [specify percentage of sales] of the normal sales in [specify month of comparison]. Even when [normal operations, e.g. dine-in] was allowed in [specify date, e.g., June 2020], sales were a mere [specify percentage] of what [name of tenant] would normally enjoy.
Even more unfortunate for all parties, on July 1, 2020, the State of California issued new health orders, mandating that [type of tenant’s business, e.g., restaurants] in Orange County must cease indoor operations. An article published by the [name of newspaper] on [specify date] entitled, [name of article] is attached herein as Exhibit 2, for your reference. As for [name of tenant], there is no ability to comply with this new law by providing an alternative means of carrying on its business, meaning they must return to sales that they expect to be about [specify small percentage of sales while governmental restrictions continue] of the normal gross revenue.
Regretfully, this level of gross sales does not begin to cover the fixed costs of the business, most notably the rent to the landlord. While [tenant] has paid [all or most] rent through the date of this letter, the continued financial frustrations and uptick in Coronavirus transmissions has led to the undeniable conclusion that this will be a long recovery for any businesses that are similarly doing next to nothing during this pandemic. Accordingly, [tenant] plans to close its doors effective [specify date].
In connection with this closing, they would like to terminate the lease and turnover possession in a prompt fashion, despite the current Emergency Rules of Court in California that disallow any unlawful detainers from proceeding at this time.
As has become all too common these days, the Coronavirus pandemic has created a frustration of purpose and impracticability of performance defense to enforcement of the contract. Related thereto, Civil Code § 1511(2) provides that the performance of an obligation is excused “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.” [In this case, there is no clause in the contract addressing what would occur in light of the irresistible, superhuman Coronavirus pandemic that has effectively shuttered certain parts of the American economy. Accordingly, the judicial decisions in California will control. Or, if there is a force majeure clause is the contract, quote the relevant portions of that clause that support your position that the clause applies to the Coronavirus pandemic.]
California liberally applies the force majeure defense, holding that “force majeure…is not necessarily limited to the equivalent of an act of God.” Pac. Vegetable Oil Corp. v. C.S.T., Ltd. (1946) 29 Cal.2d 238. The test for whether a force majeure or act of God situation is present is “whether…there was such an insuperable interference…as could not have been prevented by the exercise of due diligence.” Id.
Another California court specifically held that “force majeure is the equivalent of the common law contract defense of impossibility and/or frustration of purpose: performance of a contract is excused when an (1) unforeseeable event, (2) outside of the parties’ control, (3) renders performance impossible or impractical.” Citizens of Humanity, LLC v. Caitac Int’l, Inc. (Cal. Ct. App. Aug. 2, 2010) No. B215233, 2010 WL 3007771.
For example, in 20th Century Lites, Inc. v. Goodman (1944) 64 Cal.App.2d 938, the court discharged a defendant’s obligations to pay a plaintiff for a three-year lease of neon light advertising of the defendant’s business after a government regulation was enacted prohibiting the lighting of such signs.
The leading California case on frustration of purpose explains that “the applicability of the doctrine of frustration depends on the total or nearly total destruction of the purpose for which, in the contemplation of both parties, the transaction was entered into.” Lloyd v. Murphy (1994) 25 Cal. 2d 48, 53–54. Under doctrine of frustration of purpose, “performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration.” Lloyd, supra. “This defense applies when performance is not impossible or impracticable, but has become pointless—i.e., the main purpose of a contract has become frustrated. [See La Cumbre Golf & Country Club v. Santa Barbara Hotel Co. (1928) 205 C 422, 425-426, 271 P 476, 477—hotel agreed to pay monthly amount to golf course for use by guests, but hotel burned down].” Cal. Prac. Guide Civ. Pro. Trial Claims and Def. (The Rutter Group) Ch. 9(I)-C, 9:18.
Moreover, impracticability of performance is yet another defense to performance of contract, which applies when “a thing is impracticable when it can only be done at an excessive and unreasonable cost.” City of Vernon v. City of Los Angeles (1955) 45 Cal. 2d 710, 719–20.
In this case, the terms of the Lease clearly delineate an intention and expectation, by both parties, that the tenant would use the Premises as a [specify nature of business]. As such, the March 19, 2020 mandatory stay at home restrictions and the [specify date of later order hindering business] order mandating the [termination of the tenant’s business] within [specify county name] County have effectively frustrated the purpose of the Lease, as [name of tenant] is unable to use the Premises for the specified purpose. This has also made the performance of the Lease impracticable where the only way for the tenant to perform is at an unreasonable cost, i.e., at a guaranteed, extraordinary loss month after month.
Lloyd placed limits on the application of frustration of purpose as follows: “The doctrine of frustration has been limited to cases of extreme hardship so that businessmen, who must make their arrangements in advance, can rely with certainty on their contracts. The courts have required a promisor seeking to excuse himself from performance of his obligations to prove that the risk of the frustrating event was not reasonably foreseeable and that the value of counterperformance is totally or nearly totally destroyed, for frustration is no defense if it was foreseeable or controllable by the promisor, or if counterperformance remains valuable.”
In this case, the Coronavirus pandemic was unforeseeable not only to the tenant, but also to the United States government, as has been reflected by its response. Even the President’s trusted advisor, Dr. Fauci, at one point estimated a death toll of a quarter-million Americans- even with the shutdown that has occurred. As of the writing of this letter, the death toll in America has surpassed [specify death toll in America from Coronavirus], despite the efforts at social distancing. This shutdown has nearly eliminated the need for the services provided by the tenant. Even further, this event was entirely outside of the tenant’s control, but, rather, has occurred due to the contagious nature of the virus and, at least arguably, the slow governmental response. What has occurred has rendered performance of the contract, by way of payment of the rent and operation of the business, impossible or impracticable [OPTIONAL: The [party writing this letter, e.g. the tenant] was already running without sufficient profitability such that there is simply no purpose for the continued performance of the contract.]
[OPTIONAL: While the Coronavirus pandemic ultimately [caused this request for termination or brought the tenants to close their business], there were issues with the [the contract or condition of the property due to the landlord’s lack of maintenance] that predated the Coronavirus pandemic that created the conditions for [this need to terminate the contract or this financial failure]. Specifically, Section [specify section] of the [lease or contract] identifies the [e.g., “Lessor’s Obligations” as follows: “Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2”] Contrary to those obligations, [specify the other party’s breaches, e.g., the roof has had repeated and ongoing leaks]. This is shown in the attached [e.g., pictures of the roof, the walls, and the floors attached as Exhibit 3]. These show [e.g., water damage on the roof, water seeping down the brick walls, and water on the floor]. These issues caused repeated damage to [e.g., the business, the tenants’ personal effects, while diminishing the tenant’s reputation as a reputable business].]
What the tenant believes would occur is an analysis requiring the tenant to pay a percentage of the rent relative to the non-frustrated portion of gross income following the Coronavirus pandemic. For example, in the month of [specify month] 2020, the gross sales were a mere [specify percentage] of the regular level. This would not relieve the tenant entirely, but would instead require the tenant to pay [specify the same percentage] of the rent.
When this analysis is applied to this case, it shows that the tenant has already overpaid by $[specify amount – see Excel spreadsheet analysis, below]. Even further, assuming that conditions improve by the end of the Lease such that gross sales are [specify a higher percentage, e.g., 67%] of the expected level, the tenant would have already paid through [specify a month, e.g. the end of the Lease]. Our full analysis is attached as Exhibit 1.
We suspect that the Landlord would prefer not to go without the payment of any further rent for [specify number of months remaining on lease] months at the Premises, but rather would prefer to find a new tenant that can make a viable use of the Premises in light of the Coronavirus pandemic.
Accordingly, the tenant offers the landlord a termination of the lease on the following terms. First, the tenant will pay the lump sum of $[specify amount, e.g., two months of rent]. Second, the landlord would retain the deposit already on hand with the landlord of $[specify amount of deposit]. Third, the Tenant will leave the property in broom-swept condition on [specify date that tenant will vacate]. In exchange, the landlord would all obligations arising under the Lease. The tenant is prepared to send a check to the landlord with the memo line “Lease Termination – Paid in Full – Landlord to Retain Deposit” in exchange for termination of the Lease as of [specify date that tenant will vacate]. This check can be sent as soon as the landlord indicates its acceptance.
I hope to hear from your office on these issues by [specify a date about one week away]. I can be reached at [add your phone number] and at [your email address]. [If there is something to be done if the offer is accepted, specify that it will be done promptly, e.g. I can overnight the keys as soon as you confirm your agreement as set forth herein].
Very truly yours,
/s/ [Sender’s Signature]
Click below to download and use the analysis we have prepared to show a landlord how little may be owed if a court adopts this view of frustration of purpose.
Notice: Please contact an attorney to advise you of your rights upon an assessment of the facts in your case before using this letter. If you are trying to terminate a contract where the amount still owed is significant (e.g., more than $25,000), it is strongly advised that you contact a business attorney or bankruptcy lawyer to consider all of your options.