Death and Disability / Key Person Provisions in a Commercial Lease
In certain commercial leases, particularly for businesses that are heavily reliant on the expertise or presence of a specific individual, the tenant may negotiate for the inclusion of a death and disability or key person provision. Such a provision is designed to offer the tenant an option to terminate the lease if a designated “key person” dies or becomes permanently disabled, thereby insulating the tenant from the liability of continuing lease obligations in a situation in which it becomes impossible for the tenant to operate the business.
What Is a Death and Disability / Key Person Provision?
A Death and disability / Key person provision is a clause in a commercial lease that allows the tenant to terminate the lease if a specified key person, essential to the tenant’s business operations, dies or becomes permanently disabled. This key person could be the business owner, a highly specialized employee, or any individual whose skills, knowledge, or presence are vital to the ongoing success of the business. Without this person, the tenant may not be able to continue operating effectively or meet its obligations under the lease.
Typically, these provisions include a specific window of time within which the tenant must notify the landlord of their intent to exercise the termination option following the key person’s death or disability. If the tenant fails to act within this period, the right to terminate is usually waived, and the lease continues under its existing terms.
Key Considerations in Negotiating a Death and Disability / Key Person Provision
Identification of the Key Person
The first step in negotiating this type of provision is clearly identifying who qualifies as the key person. Both parties must agree on this designation, as it directly impacts the tenant’s ability to exercise the termination right. Landlords will typically require justification for why the specified individual is considered critical to the tenant’s business, as the inclusion of such a provision introduces an element of uncertainty into the lease term.
Termination Window
An essential component of this provision is the termination window—the period following the key person’s death or disability during which the tenant may choose to terminate the lease. Tenants often seek a longer window to allow adequate time for grieving, restructuring, or evaluating the future of the business. However, landlords may push for a shorter period to minimize the time their property remains in a state of uncertainty. Finding a balance that provides the tenant with enough time while still offering the landlord some predictability is key.
Termination Fee
A point of negotiation often arises around whether a termination fee should be included if the tenant exercises the option to terminate the lease under this provision. From a landlord’s perspective, the lease termination will likely result in a loss of rental income and potential costs associated with re-letting the space. Therefore, landlords may seek to include a termination fee to offset these losses. The fee amount could vary depending on factors such as the remaining lease term and the difficulty of finding a replacement tenant. Tenants, on the other hand, may argue against a fee, particularly if they believe that the death or disability of the key person presents an exceptional hardship that justifies a clean exit.
Impact on Lease Negotiations
The inclusion of a Death and disability / Key person provision can influence other aspects of lease negotiations. For example, landlords might be more cautious about offering concessions or favorable terms if there is a risk that the lease could be terminated unexpectedly. Tenants should be prepared to address these concerns and possibly offer assurances or additional security to alleviate the landlord’s risk.
Conclusion
Death and disability / key person provisions are an important consideration for tenants whose businesses are closely tied to the abilities of a specific individual. By negotiating such a provision, tenants can protect their business interests and provide a pathway to exit the lease if continuing operations becomes untenable due to the loss of a key person. However, these provisions must be carefully crafted, balancing the tenant’s need for flexibility with the landlord’s need for stability and financial security.
