Most of the time there will be a penalty attached to this option. Since a landlord is justifying the costs of renting a space by spreading the expense over the course of the lease, if the lease ends up being shorter, they would want to recover the appropriate portion of those costs.

The cancellation clause usually holds the tenant responsible for unamortized costs of buildout, brokerage commission, and rent concession and is typically only possible to be exercised on a given date, but sometimes any time after a certain date with a certain amount of notice.

The basic calculation is as follows:

Landlords Total Costs (Cost to build the space + Rent concession)

Divided by the lease term

Multiplied by the amount of time remaining on the lease at the time of termination

Plus the brokerage commission appropriated for the remainder of the lease

Here is an example:

The space is $10,000 per month and the tenant signs a 10 year lease with a cancellation clause after 5 years and receives 3 months of free rent. The landlord spends $120,000 to build the space.

Landlords Total Costs ($120,000 + $30,000) = $150,000

Divided by lease term (10 years) = $15,000

Multiplied by the amount of time remaining (5 years) = $75,000

Plus the brokerage commission appropriated for the remainder of the lease (~$15,000) = $90,000.

Obviously, the less the landlord spends on the buildout, the less rent concession given, and the less time left on the lease, the less the termination penalty will cost.

Also, if your broker is willing to defer payment of the last portion of their commission and only conditionally accept payment if you do not exercise your termination clause, then you can eliminate that portion of the cost.

Depending on what condition the market is in at the time of the termination, there’s a good chance it will be easier and more cost effective to sublet the space than exercise the cancellation clause, but it’s still good to have in case the market tanks or just as a worst case scenario back up plan.

In rare situations, there will not be a penalty for a termination option (typically if they are not doing any build-out, giving any free rent, and they are only paying brokers if the option is not exercised).