DOGE Puts GSA Leases in the Doghouse

As experienced government contractors know, virtually every type of federal contract allows the Government to terminate the contract for “convenience” at any time, for virtually any reason. See Federal Acquisition Regulation (FAR) 52.249-2 (Termination for Convenience of the Government Fixed-Price) (“The Government may terminate performance of work under this contract in whole or, from time to time, in part if the Contracting Officer determines that a termination is in the Government’s best interest”). The Government commonly exercises this right when, for example, the goods or services under contract have become obsolete, are no longer state-of-the-art, or are no longer needed by the buying agency. GSA leases are the exception. The FAR does not apply to GSA leases and GSA’s standard lease form does not confer a termination for convenience right to the Government—and for good reason. GSA leases can carry an occupancy term of up to 20 years. Such long-term leases often involve building modernization, renovation or construction during the term. GSA lessors frequently obtain financing to fund these efforts. In that regard, GSA does not insist on a termination for convenience clause because it knows that lenders would be reluctant to provide financing to lessors when the Government tenant can terminate the lease at any time and lessors will generally insist on a risk premium to reflect the lease term uncertainty.

So how is the Government terminating and cancelling long-term leases during the first few weeks of the Trump administration? The Trump administration has not yet made the details available. That said, we note that GSA’s standard lease form has a provision that, when included in a lease, allows an early exit, after an agreed date certain, as an alternative to allowing a lease to run for its full term. We suspect that the Trump administration may have taken advantage of such clauses, or that the affected leases may have been pending leases that were not yet signed. It is also possible that the affected leases had expired, but the Government tenant continued to occupy the space in a holdover position—such leases would be easy to “terminate” because they do not involve an ongoing expectation or obligation that the Government will keep using the space or paying rent.

Like commercial leases, GSA leases can be terminated for default. Thus, GSA can terminate a lease for default (i.e., before the lease term expires) when the lessor is in material breach. See GSA Acquisition Regulation 552.270-22 (Default by Lessor During the Term). Terminations for default require a valid justification, and the Government “bears the burden of proof with respect to the issue of whether termination for default was justified.” Dep’t of Transportation v. Eagle Peak Rock & Paving, Inc., 69 F.4th 1367, 1375 (Fed. Cir. 2023). In other words, the Government cannot validly terminate a lease for default without showing, for example, that the contractor failed to make progress in performance of an improvement; failed to provide security as required; failed to provide utilities or access as required; or engaged in some form of fraud. Given DOGE’s mandate to trim the budget of waste and the Trump administration’s desire to stop paying for unoccupied buildings, prudent GSA lessors should be ready for the Government to attempt to characterize as material even the most trivial failures to satisfy lease obligations. To protect against this, we recommend that lessors double down on their familiarity with their lease obligations, actively monitor their compliance, and contact counsel promptly upon receipt of a cure notice.

Other issues may arise where the Government seeks to terminate a GSA lease:

• GSA lease termination clauses are short, simple and generally less protective of lessors than comparable private sector provisions. For example, they may not prescribe the condition in which the premises must be left or deal with non-monetary defaults that exist on the termination date. The result may be that lessors are forced to invest more time and money into the vacated space to make it ready to be re-let to a new occupant.
• Despite the termination, the GSA tenant may hold over, or may threaten to hold over, beyond the termination date, further complicating any reletting of the premises. If the Government does hold over in the space, the lessor likely will have limited options to remedy the issue, since regular tort remedies such as eviction are not available against government tenants.
• As an alternative, GSA may seek to assign the lease. GSA’s standard assignment clause effectively lets GSA off the hook for future performance, while the assignee may assume the typically favorable, above-market rights of the Government tenant. The standard clause requires that the lessor approve the assignment in advance, but the lessor may not unreasonably withhold such consent, which leaves the lessor with much less flexibility than is customary in private sector leases.
• Subletting is another right of GSA that can raise an additional set of issues. The standard subletting clause does not require the lessor to approve the subletting—the Government may proceed with a subletting at any time. In a sublease arrangement, the Government remains as the prime tenant and is not released from its obligations toward the lessor, but the subleased space will ultimately be used by a new third party, who will enjoy tenant-favorable lease terms that the lessor may not have agreed to in a direct lease to that party.

Pillsbury has formed a multidisciplinary, bi-coastal team comprising lawyers from its award-winning Government Contracts and Real Estate groups to closely monitor developments in the federal leasing space. Our experience with GSA leases, commercial leases, responding to Cure and Show Cause Notices, the Contract Disputes Act, and terminations for default render us uniquely qualified to assist contractors facing these issues. We would be honored to assist you in preparing for or responding to situations that arise from the DOGE mandate.