There are a myriad of provisions in commercial leases that benefit either the lessor, lessee, or, in certain circumstances, both. As the provisions contained in a commercial lease can drastically impact the rights and obligations of the parties, it is of particular importance that each party effectively negotiate its position in order to obtain the most favorable terms possible. Sublet and assignment clauses are important provisions that should be considered carefully by both landlords and tenants when negotiating the terms of a commercial lease.
Subleases Versus Assignments
Sublease and assignment clauses accomplish similar results. They allow tenants to transfer their lease obligations to another individual or entity. However, each clause operates in a different way. With a sublease, a tenant transfers part of the leased property to another tenant while remaining on the premises, or transfers the entire property to another tenant for a period of time during the term of the lease. An assignment occurs when a tenant transfers all of its rights and obligations under the term of the lease to another individual or entity for the entire remaining term of the lease. Essentially, the new tenant takes the place of the old tenant and releases the old tenant of its obligations to the landlord. The extent of the obligations released depends on the terms of the assignment clause.
Assignment and Subletting Clauses
Consent Conditions: Most assignment and subletting clauses in commercial leases require landlord consent. Generally, landlord’s will insist on a consent requirement in order to retain the ability to properly “vet” a sublessor or assignee. When negotiating these provisions, the landlord and tenant should be careful to clarify under what circumstances the landlord may withhold consent. Often, landlords will be willing to include language indicating that the landlord “will not unreasonably withhold consent”.
Cost of Sublet/Assignment: Some clauses impose an application fee on tenants in order for the landlord to review a sublease or assignment request. The clause may also require that the tenant pay any attorney fees or other costs associated with the preparation of a sublease/assignment agreement. In some cases, the clause may allow the landlord to increase the rental rate upon sublease or assignment. Such clauses tend to discourage potential sublessors and assignees.
Continuing Obligations: Most assignment clauses also require that the old tenant remain liable to the landlord in the event that the sublessor or assignee default for any reason. This means that, should the sublessor or assignee fail to pay rent or default for any reason, the assignor (prior tenant) becomes liable for the breach. From a landlord’s perspective, the original lease is entered into after significant scrutiny. As such, landlords typically want to retain as much control as possible. By insisting on a tenant’s continuing liability, they afford themselves an additional layer of protection. However, in cases where tenants anticipate selling their business prior to the end of the lease term, it is advisable to negotiate with landlords for more liberal assignment language. Depending on the parties relative bargaining positions, landlords may be willing to include a novation provision wherein the assigning tenant will be absolved from any obligations under the lease. More likely, however, tenants will have a better chance seeking novation after presenting landlord with a viable assignee at the time an assignment is requested.
Recapture Clauses: Recapture clauses provide landlords with maximum advantage. Generally, a recapture clause allows landlords to terminate the lease merely because a tenant requests a sublease and/or assignment. In essence, where a commercial lease includes a recapture clause tenants are effectively precluded from assigning the lease. Otherwise, the risk of termination is too great. Recapture clauses allow landlords to decide whether they wish to withhold consent to an assignment, consent to the assignment or to terminate the lease and, at least in theory, approach the proposed assignee to negotiate a new lease independently of the assignor. Tenants should always try and negotiate for the removal of recapture clauses. For landlords desirous of retaining maximum control over who their tenants are, recapture clauses are beneficial.
Partnership and Corporate Concerns: Assignment clauses are also generally triggered where a corporation, limited liability company or partnership transfers more than twenty-five percent (25%) of its ownership to a third party. Often, unsuspecting tenants trigger assignment provisions when they decide to bring on additional investors. Ideally, tenants should negotiate for a higher percentage such as fifty percent (50%). Either way, it’s important for tenants to be aware of these provisions to avoid breaching the assignment provisions in their lease. For instance, if a corporation sells 30% of its shares and the triggering percentage is 25%, it will be in violation of the lease assignment provisions if it does not obtain the landlord’s consent.
To ensure maximum legal protections, it is important for landlords and tenants to consult with an attorney before and during the negotiation of a commercial lease. If you have questions about commercial leasing, contact a San Diego business attorney today.