Definition
A kick-out clause is a contractual provision allowing a seller or landlord to terminate an agreement if specific conditions are not satisfied. It is most commonly used in purchase contracts involving contingencies (such as sale-of-home contingencies) or in leases tied to performance thresholds.
Common Applications
1) Purchase Agreements
Frequently used when a buyer’s offer is contingent on selling another property.
- Seller continues marketing the property.
- If a stronger offer is received, the seller notifies the original buyer.
- The buyer must remove the contingency within a specified period (e.g., 48–72 hours) or be “kicked out.â€
2) Commercial Leases
May allow a landlord to terminate a lease if:
- Tenant sales fall below a required threshold.
- An anchor tenant vacates.
- Specific co-tenancy conditions fail.
Purpose
- Reduces seller or landlord risk.
- Maintains flexibility in uncertain transactions.
- Encourages faster contingency resolution.
- Protects against prolonged contract lock-ups.
Example (Residential)
A buyer makes an offer contingent upon selling their current home. The contract includes a kick-out clause allowing the seller to accept backup offers.
If another buyer presents a non-contingent offer, the original buyer has 72 hours to waive the contingency or the seller may terminate the agreement.
Example (Commercial Retail)
A retail lease includes a kick-out clause allowing the tenant to terminate the lease after year three if gross sales do not exceed a minimum annual threshold.
Financial Impact
- Reduces time-on-market risk.
- Improves liquidity for sellers.
- Provides performance protection in retail leasing.
- May reduce perceived contract certainty for buyers.
Negotiation Points
- Notice period length.
- Required evidence of competing offer.
- Performance benchmarks (in leases).
- Refundability of earnest money.
Risks and Pitfalls
- Buyer uncertainty during contingency period.
- Ambiguous triggering conditions.
- Misunderstanding notice deadlines.
- Market perception issues in competitive environments.
Underwriting Considerations
- Assess probability of contingency satisfaction.
- Model potential downtime or re-marketing costs.
- Review lease termination impacts on valuation.
- Analyze performance thresholds carefully in retail assets.
Kick-Out Clause vs. Termination Clause
- Kick-Out Clause: Triggered by specific conditional events.
- Termination Clause: May allow broader unilateral termination rights.