Focusing on Tenant Needs

dr. Tamás Balogh, Attorney at law, Schoenherr Hetényi Attorneys at Law

No wonder, then, that the latest office developments in Budapest are offering relaxation areas, green community spaces and terraces and in some cases even outdoor working areas. As expected, the coming years seem likely to follow the upward trend of the previous year and the growth of these high quality, green and eco-friendly office spaces will continue. The tendency is not only bolstered by the tenants’ changing expectations, but also by the limited supply of newly developed high quality office spaces, low vacancy rates and the positive macro-economic outlook of the country.

Although a significant portion of new projects are pre-leased, some developers on the market are not afraid to take additional risks and offer speculative developments for future tenants. Given that, during the years of the financial crisis, the office market was lacking in new office developments and tenants are currently striving to keep their existing employees and to attract new ones, many businesses are considering changing their leasing strategy and moving to one of the newly developed offices.

From time to time, the question arises whether such an exit is permitted by the applicable lawful and contractual provisions and what could be the legal ways out of long-term commitments. It is widely known that, in the case of an indefinite term lease, both the landlord and the tenant may terminate the agreement at any time during the lease term. Of course, it should be kept in mind that termination rights must always be exercised in line with the relevant provisions of the lease agreement.

Although more traditional definite term lease agreements do not provide early exit options for the parties, it may be worth having a brief overview of termination rights and the legal consequences of an unjustified early termination. As described above, definite term lease agreements may not be terminated with an ordinary notice, i.e. without referring to a particular cause of termination, unless the parties explicitly agree upon ordinary termination rights and the notice period to be applied for such termination.

Apart from the above, a serious breach of contract may entitle the tenant, as the injured party, to terminate the lease with immediate effect by submitting an extraordinary termination to the landlord. The event of breach on the landlord’s side that is usually referred to is non-compliance with the material obligations of the landlord (e.g. the leased offices are not suitable for their intended, contracted purpose or the utilization for that purpose is severely restricted). Nevertheless, terminating a lease without a valid legal ground by a tenant may not be a legally safe option, as such termination may not be held lawful in case of a court test.

Should the tenant terminate the lease due to an unlawful reason or otherwise refuse to pay the rent, at the end of the day, the landlord may ask for compensation for damages caused. In this respect, however, it should be noted that, as opposed to the widely-held assumption, the landlord could not simply ask for all the income that would have been due in the remaining term of the lease. Given the obligation of the landlord to mitigate any damages occurred as a result of an unlawful early exit, the compensation could be reduced by several elements. For example, any damages of the landlord shall be reduced with the reasonably collectable income that the landlord should be able to realize by way of lease of the offices under current market terms to others, which shall be done without any delay.

Although it may seem tempting for some tenants to switch their leases to an office in one of the prestigious newly constructed buildings, it is not advisable to terminate their existing lease agreements without due cause with regard to the above legal consequences of unlawful termination. Instead, it might be worth considering starting amicable negotiations about the closure of the lease relationship with the landlord. Although it is not common on the market, we have seen fruitful negotiations between the parties underpinned by financial compensation granted for the landlord for the early exit of the tenant.

Nevertheless, it shall always be kept in mind that financially sound and reputable tenants that are long-standing clients represent key assets for landlords. Therefore, it is of utmost importance for a landlord to keep its decent client portfolio. Consequently, in most cases landlords have an open mind to specific requests of their clients, even by renovating or reconstructing the leased offices in line with the latest trends so that it corresponds to their tenants’ needs to the greatest extent.