Kick-Out Clause in Commercial Real Estate Leases
What Is a Kick-Out Clause?
A kick-out clause is a lease provision that grants the tenant the right to terminate the lease if their gross sales fall below a specified threshold during a defined measurement period. Unlike general early termination clauses (which require a fee regardless of performance), kick-out clauses are triggered specifically by underperformance, reflecting the economic reality that a retail location that doesn't generate sufficient sales isn't viable for the tenant.
Kick-out clauses are found almost exclusively in retail leases and are most common among national and regional retail tenants with 15-30% of their leases containing some form of performance-based termination right. They are particularly prevalent in leases for new or unproven retail locations where the tenant wants protection against site-specific underperformance.
How Kick-Out Clauses Work
Sales Threshold
The threshold is the minimum annual gross sales the tenant must achieve to maintain occupancy. If actual sales fall below this threshold during the measurement period, the kick-out option becomes exercisable.
Example language: "If Tenant's Gross Sales during any consecutive twelve (12) month period following the twenty-fourth (24th) month of the Lease Term are less than $1,500,000, Tenant may terminate this Lease by providing Landlord not less than one hundred twenty (120) days' prior written notice."
Setting the threshold: Thresholds are typically set at 70-85% of the tenant's projected sales for the location. Setting the threshold too high gives the tenant easy exit; setting it too low renders the clause meaningless.
Measurement Period
The period over which sales performance is evaluated. Key variables include:
Startup exclusion: Most kick-out clauses exclude the first 12-24 months of the lease term, allowing the tenant time to establish the location before the performance test applies.
Measurement window: Typically a trailing 12-month period, though some clauses require two consecutive underperformance periods before the option activates.
Multiple test periods: Some clauses allow the kick-out only during specific windows (e.g., "exercisable only during months 24-36 of the lease term").
Exercise and Consequences
Once the performance threshold is not met, the tenant must affirmatively exercise the option through written notice within a defined window. Failure to exercise typically waives the right for that measurement period. Kick-out clauses may or may not include a termination fee — when they do, the fee is usually lower than a standard early termination fee because the poor performance justifies the exit.
Kick-Out vs. Co-Tenancy vs. Early Termination
| Feature | Kick-Out Clause | Co-Tenancy Clause | Early Termination |
|---|---|---|---|
| Trigger | Tenant's own sales underperformance | Departure of other tenants | Tenant's discretion (any reason) |
| Measurement | Gross sales vs. threshold | Occupancy % or named tenant presence | Calendar date |
| Typical remedy | Termination right | Rent reduction, then termination | Termination right |
| Termination fee | Low or none | None | Significant (unamortized costs) |
| Property type | Retail only | Primarily retail | All property types |
Landlord Perspective: Managing Kick-Out Risk
For landlords and asset managers, kick-out clauses create portfolio risk that must be monitored. Key management strategies include:
Sales monitoring: Track tenant sales reports against kick-out thresholds proactively. If a tenant is approaching the threshold, early intervention (marketing support, lease restructuring) may prevent activation.
Portfolio aggregation: Identify all leases with kick-out provisions and their respective thresholds and measurement dates. Multiple kick-outs activating simultaneously can create cascading vacancy.
Underwriting adjustment: Model kick-out probability based on the tenant's category performance and the specific threshold-to-projected-sales ratio.
How AI Extracts Kick-Out Clauses
- Threshold extraction: Identifying the sales threshold amount and measurement methodology.
- Measurement period: Extracting startup exclusions, measurement windows, and consecutive-period requirements.
- Exercise mechanics: Documenting notice requirements, exercise deadlines, and any termination fees.
- Gross sales definition cross-reference: Linking the kick-out threshold to the lease's specific gross sales definition (which may differ from the percentage rent gross sales definition).
- Interaction mapping: Identifying how the kick-out clause interacts with co-tenancy provisions, percentage rent, and other performance-linked terms.