proposed assignment of the lease

Commercial Lease Assignment and Sublet Provisions

A balancing act for landlords and tenants, july 2020 by adam f. aldrich.

This article identifies common problems involved in commercial lease transfers through assignments and subleases. It offers both landlords and tenants tips for solving these problems when negotiating assignment and sublease provisions in leases.

The modern commercial lease is a complex, integrated document that attempts to balance the competing interests of the landlord and tenant. As a result, commercial leases are the subject of much negotiation and are never “one size fits all.” In fact, commercial leases are one of the least standardized documents in real estate practice.

When any commercial lease is to be transferred in part through a sublet or in its entirety through an assignment, the issues multiply. The transfer provisions, which once seemed moot, become operative to determine whether the lease can be transferred and, if so, under what conditions. If, during lease negotiations, the parties overlooked the lease transfer provisions or gave them cursory consideration, they may be unpleasantly surprised by the result. While landlords and tenants have divergent economic interests with respect to transferring the lease, their legitimate concerns can be appropriately addressed through thoughtfully crafted transfer provisions.

This article explores common problems, issues, and solutions encountered in commercial lease transfers through assignments and subleases. It is intended to be useful both to the lawyer who infrequently encounters lease transfer problems and the seasoned practitioner who deals with lease transfer issues every day.

Distinguishing Between an Assignment and Sublease

Assignments and subleases have fundamental differences that are frequently misunderstood. A lease is both a conveyance of an interest in property and a contract. 1 After executing the lease, the landlord and tenant are bound to one another by privity of contract and by privity of estate. As a result, they may each enforce the provisions of the written lease through privity of contract and the promises that arise from privity of estate. 2 Privity of contract allows enforcement of the lease provisions, while privity of estate allows enforcement of only those promises that run with the land. 3

Whether the landlord, tenant/assignor, and subtenant/assignee call their arrangement an assignment or a sublease, courts typically look at the substance of the transaction. In an assignment, a tenant transfers its entire interest in the lease. 4 After assigning its interest in the lease, the assignee has privity of estate with the landlord, but the assignee and the landlord are not in privity of contract unless the assignee assumes the tenant’s obligations under the lease. 5 Assignment of the lease ends the original tenant’s rights to possession, but absent an express release under the lease terms, its liability under the lease continues. 6 This means the original tenant remains secondarily liable for the assignee’s obligations under the lease. Thus, the tenant/assignor may find itself liable at a future date if the assignee fails to perform its obligations under the lease.

In a sublease, however, the tenant transfers less than the remaining term or less than the tenant’s entire interest in the lease, leaving the original tenant with a reversionary interest in the lease. 7 The relationship between the original landlord and the original tenant, including both privity of contract and privity of estate, remains intact, thereby creating the relationship of landlord and tenant between the original tenant (sublandlord) and the new tenant (subtenant). The original landlord and the subtenant have no privity of estate or privity of contract with one another, so the original tenant remains liable for the actions and omissions of the subtenant. 8 However, the subtenant’s rights will terminate with the original lease or when the landlord declares a forfeiture of the tenant’s lease term. 9

A third, less common type of transfer is a partial assignment of a lease. Such assignments are called assignments “pro tanto,” not subleases, because they grant possession of a portion of the leased premises to the new tenant for the balance of the lease term. 10 The landlord now has two tenants and, in effect, two leases. There is little guiding case law on this hybrid lease transfer, so it is not entirely clear whether the assignee has a contractual relationship with the landlord. 11 Due to the vagaries and uncertainties that can result when a transfer of possession encompasses less than all of the space, partial assignments should be avoided. To avoid assignments pro tanto, landlords should consider prohibiting assignments of less than the original tenant’s entire interest in the lease. If a landlord proceeds with a partial assignment, it should clearly document the arrangement, including the rights and remedies of the landlord, original tenant, and new tenant, and acknowledge the transaction as a partial assignment and not a sublease. 12

The accompanying table illustrates the many differences between an assignment, sublease, and partial assignment. 13

Restrictions on Assignments and Subleases

Colorado law favors the free transferability of rights. 14 As a result, landlords frequently attempt to limit the tenant’s right to transfer the lease by including lease provisions specifically restricting the tenant’s right to assign or sublet. Under Colorado law, outright prohibitions against assignments are permissible and are not considered invalid restraints on alienation. 15 Even if outright prohibitions on assignments or subletting are enforced, such provisions “are construed against the restriction.” 16 This means a court generally will construe such stipulations “against the party invoking them.” 17 A breach of the restriction against transfer does not terminate the lease, 18 but may give rise to a claim for default. 19 Generally, tenants in commercial leases negotiate exceptions to strict prohibitions against assignments or subletting because transfer provisions may be their only viable exit strategy if they find they can no longer afford the space or no longer need it.

Consent to Assignments and Subleases

Recognizing that absolute prohibitions are neither favored by the courts nor acceptable to most tenants, some landlords include modified prohibitions in their leases that limit the tenant’s rights to transfer the lease and, if a transfer is permitted, allow the landlord to enforce the lease against both the original tenant and the new tenant to the maximum extent possible. Such provisions may reserve to the landlord, either in its sole discretion or without unreasonably withholding its consent, the right to approve a proposed lease transfer. Although the reservation of the landlord’s right to approve a proposed assignment or sublease is for the landlord’s benefit, 20 the landlord is bound to the standards set out in the lease for consents to an assignment or sublease. 21 Accordingly, once the landlord has established the standards for its consent in the lease, it cannot object to a proposed assignment or sublease if the tenant has met the appropriate requirements.

It is well established in Colorado law that “without a freely negotiated provision in the lease giving the landlord an absolute right to withhold consent, a landlord’s decision to withhold consent must be reasonable.” 22 Thus, if a lease contains a provision against subletting or assignment, but is silent on a landlord’s right to withhold consent, Colorado law forbids the landlord from withholding its consent unreasonably if the tenant tenders a suitable subtenant or assignee to the landlord. 23

Disputes often arise as to what is a ‘‘reasonable” withholding of the landlord’s consent. This debate has led to the enunciation of specific standards of reasonableness. If a lease provision “requires that consent to an assignment will not be unreasonably or arbitrarily withheld, a landlord is held to the standard of conduct of a reasonably prudent person.” 24 Therefore, a landlord must only consider “those factors that relate to a landlord’s interest in preserving the value of the property,” 25 which do not include “[a]rbitrary considerations of personal taste, convenience, or sensibility . . . .” 26 Whether a landlord has acted reasonably is a fact-specific inquiry. 27 Most courts have held that the tenant bears the burden of proving that the landlord acted unreasonably in withholding consent, 28 but some courts have required the landlord to prove it acted reasonably. 29 Courts have been divided on a tenant’s right to terminate a lease where the landlord has been found to have unreasonably withheld consent. 30

There are several reliable rules that courts follow in determining whether a landlord acted reasonably. First, a landlord cannot refuse consent for racial or other discriminatory reasons. 31

Second, a landlord may not deny consent to improve its general economic position or to receive increased rent. 32 However, a landlord may deny consent to protect its interest in the value, condition, and operation of the property or the performance of lease covenants. 33 For example, in Cafeteria Operators L.P. v. AMCAP/Denver Limited Partnership , the tenant leased the premises to run a cafeteria-style restaurant. 34 After several failed attempts to operate the restaurant, the tenant marketed the space to prospective subtenants, including non-cafeteria restaurant owners. 35 When a non-cafeteria restaurant owner expressed interest in subleasing the premises, the tenant sought the landlord’s approval to the proposed sublease, but the landlord refused. The Court found that the landlord reasonably withheld consent because the proposed sublessee would have changed the “character” of the shopping center by operating “the largest restaurant of its kind, raising concerns about lighting, maintenance, traffic, and parking.” 36 Moreover, the subtenant would sell alcohol and stay open late, and its proposed occupancy raised “concerns about security, safety of patrons, and parking requirements.” 37 Similarly, the Court in List v. Dahnke found that the landlord reasonably withheld consent where the landlord determined that a Thai-American restaurant operated by the assignee would not be successful at that location, but the Court did not identify the facts that led the landlord to such conclusion. 38

Third, a court may make a finding of unreasonableness if a landlord refuses consent to a proposed transfer without obtaining relevant information to make its decision. 39 Before making the decision, the landlord should obtain sufficient information on the transferee’s financial condition; the transferee’s experience in operating its business; how the premises are to be used; projected sales, gross income, and income per square foot; and, in the case of a sublease, the size of the subleased space. 40

Fourth, courts may consider how long it takes the landlord to make the decision on the requested assignment. If the landlord instantly refuses consent or waits too long to make a decision, the court could make a finding of unreasonableness. 41 Conversely, if the tenant fails to allow the landlord a reasonable amount of time to issue a decision, the withholding of consent can be found reasonable. 42 In Parr v. Triple L&J Corp. , the Court found that the landlord unreasonably withheld consent when it deferred making a decision on the proposed assignment, thereby delaying the sale of the tenant’s business until the prospective buyer withdrew his offer. 43 The tenant sought approval from the landlord for an assignment of the lease as part of the sale of its business. The landlord requested all personal and financial information on the proposed assignee and the assignee’s business plan, and the tenant provided prompt responses that demonstrated the assignee’s experience in restaurant management and “perfect credit score.” 44 Because the landlord unreasonably withheld consent, the landlord was held liable to the tenant under a breach of contract theory, as well as for lost profits on the sale of its business. 45

Similarly, the Court in Bert Bidwell Investors Corp. v. LaSalle and Schiffer, P.C. addressed whether the landlord unreasonably withheld consent to the tenant’s request to transfer the lease where the assignee was “ready, willing, and able to assume the lease as written, and to use the premises for the same business as that of the tenants.” 46 The landlord ultimately refused consent because it “didn’t like” the proposed assignee. 47 Based on the lease, which required the landlord’s consent to assign, the landlord argued that it “had the right to relet the premises as it saw fit and to be arbitrary in doing so.” 48 Relying on List , the Court found that the landlord acted unreasonably in refusing to accept the proposed new tenant. 49 Nevertheless, parties may create their own standards and definition of reasonableness, and if they do, courts will enforce and apply such standards. 50

As these cases illustrate, if a landlord wishes to withhold consent absent a sole and unconditional contractual right to do so, it must have fact-based reasons for doing so and cannot arbitrarily withhold or delay its consent. The landlord should communicate its decision in writing to the tenant and enumerate all fact-based reasons to preserve all arguments for reasonableness. 51 Before making the request to assign or sublet the premises, the tenant should gather information about the proposed assignee’s or subtenant’s financial status, business acumen, and proposed operations, and then submit this information to the landlord, along with an assignment or sublease document signed by the tenant and assignee or subtenant. While the landlord must still consent to the transaction, 52 such documentation places the tenant in a stronger position to rebut any superficial or arbitrary reasons the landlord may proffer for denying consent. And if litigation ensues, it will be critical for the tenant’s case to show that it supplied the landlord with as much information as possible concerning the assignee’s or subtenant’s financial status and operations, to avoid having the trier of fact determine that the landlord acted reasonably in denying consent due to a lack of information from the tenant.

Recapture, Termination, and Renewal Rights

Leases may grant the landlord the right to terminate the lease and to retake the tenant’s space if the tenant wishes to assign its lease or sublet its space, or if the tenant transfers the lease without the landlord’s consent. Replacing the tenant by recapturing the premises can benefit both the landlord and the tenant, but each party will want to weigh the pros and cons of such an agreement.

Terminating the lease allows the landlord to eliminate existing lease weaknesses and to enter into a new lease with a potentially better tenant on a clean slate. Moreover, recapturing the premises and directly leasing it to the proposed assignee can save the landlord substantial dollars in tenant improvements that can be passed on to the new tenant through reduced or free rent for a portion of the lease term. But the landlord must pay close attention to market conditions before terminating the lease. Terminating the lease in a strong market when space is at a premium and rents are high allows the landlord to enter into a new lease with a new tenant at a higher rate, but the landlord may take a loss on its investment in the premises in a down market when rates are depressed and there is an oversupply of space.

The tenant, on the other hand, risks losing its investment in its business and the leased premises. Before requesting a transfer, the tenant should closely scrutinize the lease to determine the potential outcome. Under some leases, the act of notifying the landlord of an intent to assign or sublet can trigger the recapture provision. 53 Similarly, if the lease is assigned without the landlord’s consent, it may trigger the recapture right if that right is expressly provided in the lease. 54 Landlords should closely review the recapture language before terminating the lease because restraints on alienation and lease forfeitures are disfavored. 55

When a tenant violates the transfer provisions by transferring the lease without the landlord’s consent, the landlord should send a notice of default to the tenant and demand that the default be cured by nullifying the transfer, 56 unless the lease provides that transferring the lease is an automatic termination. If the tenant is unable to nullify the transfer when it receives the notice, it could be liable for default damages incurred by the landlord. 57 If the tenant does not cure the default and the landlord will not approve (and has the right not to approve) the assignee or subtenant, the landlord may terminate the lease (or the tenant’s right to possession) if the lease so permits. 58 If the landlord fails to terminate the lease 59 or accepts rent after breach of the anti-assignment clause, 60 it may be deemed to have waived the right to terminate. Once the lease is terminated as a result of the default, the landlord must consider its duty to mitigate damages. 61

If the space is recaptured and the lease terminated, the tenant’s lease obligations will be terminated with respect to all recaptured space, including the payment of rent. 62 Moreover, the tenant will no longer have privity of contract or estate with the landlord, assignee, or subtenant because the lease will be terminated as to the tenant. 63 If the landlord recaptures the premises, the tenant is spared the rent expense while it finds a transferee. But if the landlord does not recapture, the tenant can make a transfer without fear that the landlord will then exercise its recapture rights.

Another important issue is whether an option to renew contained in a lease assigned or subleased to a third party remains exercisable following the transfer. If the assigned lease gives the original tenant a renewal option, the assignee can extend the term unless the renewal option is reserved from the assignment. 64 If a tenant/sublandlord grants its subtenant an option to renew based on the tenant’s option in the prime lease, the subtenant is dependent on the tenant/sublandlord for a lease extension because it does not have contractual privity with the landlord. 65 If the tenant/sublandlord refuses to exercise its renewal option so as to enable the subtenant to take advantage of the rights that were granted to it, the tenant may be liable to the subtenant. 66 To protect its option to renew, the subtenant should request or require a recognition agreement from the landlord when negotiating a sublease, whereby the landlord agrees to recognize the sublease if the prime lease terminates due to the tenant/sublandlord’s default. 67

The Impact of Bankruptcy Proceedings on Assignments and Subleases

Bankruptcy laws can have a significant impact on commercial leases when the tenant files for bankruptcy protection. Generally, a trustee is appointed to administer the bankruptcy estate, except in Chapter 11 cases where the debtor-in-possession is the tenant. 68 For debtors with executory contracts and/or unexpired leases, 11 USC § 365 contains a series of rules that govern those documents. Section 365 of the bankruptcy code provides the tenant/debtor with the statutory right to assume or reject executory contracts and unexpired leases to which it is a party, subject to objections by creditors and other parties-in-interest, and ultimately the court’s approval. 69 The debtor may, in turn, assign the lease if the assignee provides “adequate assurance of future performance.” 70 During the period between filing the bankruptcy petition and the date on which the lease is assumed or rejected, the tenant must continue to pay rent and perform the material terms of the lease. 71 It should be noted that written waivers of § 362’s automatic stay have been found to be unenforceable unless they are part of a previous bankruptcy proceeding. 72 Thus, landlords should not assume that a waiver in the lease is enforceable if the tenant files for bankruptcy.

From the debtor’s perspective, the right to reject the lease is “vital to the basic purpose of Chapter 11” because it can free the tenant from the obligation to pay all future rent under the lease. 73 If a lease is rejected with bankruptcy court approval, the debtor has no legal interest in the lease or the leased premises, and it must vacate the leased premises. If, however, the debtor fails to vacate the premises, the landlord can file a motion to lift the automatic stay so it can file or continue an eviction action in state court. If the debtor rejects the lease, the landlord may have a claim for “rejection damages” pursuant to 11 USC § 502(b)(6), subject to the mitigation-of-damages duty. 74

As a condition to assuming the lease, the debtor must cure all monetary defaults and provide adequate assurances of future performance under the lease. 75 A debtor who assumes the lease may be able to assign the lease free of restrictions on transfer set forth in the lease and over the landlord’s objection, 76 which may turn out to be a significant right for the debtor if it holds a below-market lease with sufficient time remaining on the lease term. However, a bankruptcy court has discretion to reject an assignment if it finds, for example, that the assignment would disrupt the tenant mix by changing the image of a shopping center or violating the use restriction in the lease. 77 A landlord may favorably view the debtor’s assumption because it assures continuation of the lease and the cure of existing defaults. But if the tenant is holding a below-market lease, the landlord may favor rejection to enable it to negotiate a new lease. A landlord may object to the debtor’s attempted lease assumption if the landlord disagrees with the debtor’s plan to cure the default or believes the debtor has not provided adequate assurance that the default will be cured or the debtor will perform in the future.

Section 365(b)(3)(C) of the bankruptcy code provides specific protections for “a lease of real property in a shopping center” by providing that no assignment can occur without assurances that use clauses and other provisions vital to the operation of the shopping center will continue to be performed, “including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center.” The purpose of § 365(b)(3)(C) “is to preserve the landlord’s bargained-for protections with respect to premises use and other matters that are spelled out in the lease with the debtor-tenant.” 78 Moreover, § 365(b)(3)(D) requires adequate assurance “that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center.” Despite the bankruptcy code’s language protecting shopping centers, some bankruptcy courts have found lease provisions that limit the use of the shopping center premises to be per se restraints on alienation. 79 To avoid an adverse ruling if a shopping center tenant files for bankruptcy, a landlord should arm itself with as much evidence and expert testimony as possible to show a disruption in tenant mix or a real potential for violating other tenants’ rights if an assignment is allowed. 80

While a tenant’s bankruptcy filing places the lease in limbo, a landlord can be proactive by approaching the tenant to determine whether it intends to reject or assume the lease. Landlords and tenants should not treat the existing lease as a static document that presents the tenant with a “take it or leave it” proposition for assumption. If the tenant voices concerns about the current lease, the landlord can renegotiate the lease to entice the tenant to assume a modified lease (subject to court approval) that keeps the tenant in the premises and paying rent.

Negotiating Lease Transfer Provisions

Negotiating lease transfer provisions is an important process for both the landlord and the tenant because, at some time in the future, the landlord or the tenant may be forced to accept a previously unknown or undesirable counterparty to the lease. It is critical that attorneys impress upon their respective clients the short-term and long-term ramifications that could result from their negotiations of the lease transfer provisions. Landlords and tenants should consider the following issues when negotiating assignment and subletting provisions.

The Landlord’s Perspective

• The landlord’s primary objective in negotiating assignment and subleasing provisions is control , including control over the mix of tenants and control over the use of the leased premises. Thus, the landlord will use the transfer provisions to protect its interests in the premises.
• A landlord’s foremost concern is almost always the tenant’s ability to pay rent, in full, on a timely basis. A landlord should negotiate requirements that a prospective assignee or subtenant must meet, such as minimum net worth and minimum gross sales.
• The landlord can protect itself by including a right to recapture the premises if a tenant seeks to assign its lease or to sublet its premises. However, landlords should carefully consider whether to include language that terminates the lease automatically upon receipt of an assignment request because it could constitute a restraint on alienation, which is disfavored, and the landlord may prefer the leasehold to continue. 81
• The landlord should keep the original tenant on the hook. Landlords should oppose any transfer provision that relieves the original tenant of its obligations under the lease upon an assignment. Having a tenant with a vested interest in the assignee’s ability to perform the lease is helpful to ensure that a lease is transferred to a worthy transferee. Additionally, in the event the assignee does default, if the original tenant’s liability has been preserved, the landlord’s chances of recovery are improved.
• The landlord should limit the use rights of a subsequent assignee or subtenant. A landlord should seek to protect its right to control the mix of tenants, particularly in retail settings, so as not to violate exclusive use provisions. 82 Moreover, exclusives and use restrictions held by other tenants at a shopping center must be considered in conjunction with a potential change in use that may occur upon assignment or subletting.
• The landlord should seek to share in excess rent. 83 For example, where a tenant assigns its lease or subleases its premises, it may be paid more than the amount the tenant is obligated to pay the landlord under the lease. If the assignment or sublease had not been entered into, those same financial accommodations would theoretically have been available to the landlord if it had leased directly to the assignee or subtenant. Accordingly, a landlord should seek the right to share in this excess financial consideration along with the tenant, or if it has the leverage, to obtain 100% of such excess.

The Tenant’s Perspective

• The tenant’s goal is maintaining flexibility. The tenant’s ability to maintain flexibility through the lease largely depends on its leverage to negotiate favorable lease terms. A new business seeking space in a desirable retail shopping center may have little or no leverage to negotiate the transfer provisions, but a large corporation leasing significant space may have considerable negotiating strength. Thus, it is imperative that the tenant’s leasing broker and attorney understand the market forces at play in any lease negotiation.
• The tenant should seek flexibility to share the leased premises or certain portions of it (i.e., floor space, utilities, and parking) with its related entities and affiliates with which it has a business relationship, without having to seek the landlord’s consent in each instance. This issue is particularly important for large companies with divisions that operate under different business names.
• The tenant should also seek flexibility to restructure its organization without the landlord and the lease acting as an impediment to such alteration, by negotiating into the lease specific language permitting such changes. The tenant’s ability to reorganize its business, either through a merger, consolidation, or sale, could be delayed or impeded by the landlord under the transfer provisions if these provisions are not properly negotiated at the letter of intent stage or before the lease is executed.
• The tenant should maintain an exit strategy if the premises no longer satisfy its business needs because it has outgrown the space or needs less space. This is particularly important in the era of COVID-19. For example, start-up companies can quickly outgrow their leased premises, but if the landlord does not have more space available, the company must seek out new or additional space, frequently at a higher rate. Conversely, a change in economic forces can cause the tenant’s business to quickly retract. Thus, prospective tenants should be mindful to negotiate termination and rights of first refusal options for newly available space in the same building, with the end goal of ensuring that the size of their leased space does not impair their business objectives. 84
• The tenant should insist that the landlord’s right to approve a lease transfer not be unreasonably withheld, if the landlord insists on reserving such right. The lease should detail the specific standards the tenant must meet to obtain approval, such as the transferee’s minimum net worth and minimum business experience.
• Counsel for the tenant should attempt to include a provision for automatically releasing the tenant and any guarantor from further liability at the time of the lease transfer or after the transfer occurs if the assignee or sublessee can meet or exceed certain financial marks, such as net worth, sales, or revenue.
• The tenant should negotiate (1) the right to revoke a transfer request during a defined period after the landlord issues a notice to terminate and recapture the premises, and (2) a reasonable period to vacate the premises before the tenant will be subject to eviction proceedings if the tenant does not revoke the transfer request. Where the landlord insists on a termination and recapture provision, this rescission right provides a tenant the flexibility to stop the recapture process according to the tenant’s particular circumstances and commercial exigencies.

The relationships established between the parties to a lease, sublease, or assignment can be complicated. While the ability to transfer the lease can be a valuable tool for the tenant, the landlord’s interest in protecting its investment by choosing its occupants is equally compelling. However, a balance can be struck that provides the tenant the flexibility it needs while preserving the landlord’s control and minimizing its risk. During lease negotiations, both parties should recognize that changing circumstances during the lease term could trigger the need to assign the lease or sublet the premises. If thoughtful attention is given to negotiating the transfer provisions, the parties can assure themselves that, if the need arises to transfer the lease, their respective interests will be reasonably protected.

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Adam F. Aldrich is the founder of Aldrich Legal, LLC, a Denver-based law firm focused on real estate and business transactions and litigation—(303) 325-5683. Coordinating Editor: Christopher D. Bryan .

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1 . Schneiker v. Gordon , 732 P.2d 603, 606 (Colo. 1987) (recognizing the “dual nature of a lease” as both a contract and a conveyance of an interest in land).

2 . Id. at 606–07.

3 . Shaffer v. George , 171 P. 881, 882 (Colo. 1917).

4 . Gordon Inv. Co. v. Jones , 227 P.2d 336, 340 (Colo. 1951).

5 . Shaffer , 171 P. at 882.

6 . Roget v. Grand Pontiac, Inc. , 5 P.3d 341, 345 (Colo.App. 1999) (“after the assignment, the assignee becomes primarily liable for the obligations under the contract, while the assignor remains secondarily liable”).

7 . Gordon Inv. Co. , 227 P.2d at 340.

8 . J.E. Martin, Inc. v. Interstate 8th St. , 585 P.2d 299, 301 (Colo.App. 1978) (“the delegation of duties under a lease and their assumption by a third person do not absolve the original lessee, absent the lessor’s knowledge and consent, simply by virtue of the conduct of the lessee and third party”). See also 1 Friedman and Randolph Jr., Friedman on Leases § 7:7.2 (Practising Law Institute 5th ed. 2013).

9 . V.O.B. Co. v. Hang It Up, Inc. , 691 P.2d 1157, 1159 (Colo.App. 1984).

10 . Friedman and Randolph Jr. , supra note 8 at § 7:4.2.

11 . Barbuti, “Assignments Pro Tanto And Why To Avoid Them,” 22 The Practical Real Estate Lawyer 24, 24–25 (Sept. 2006).

12 . Id. at 24.

13 . Id. at 23 (reprinted in part).

14 . Parrish Chiropractic Ctrs., P.C. v. Progressive Cas. Ins. Co. , 874 P.2d 1049, 1052 (Colo. 1994) (“Contract rights generally are assignable, except where assignment is prohibited by contract or by operation of law or where the contract involves a matter of personal trust or confidence”).

15 . Union Oil Co. of Cal. v. Lindauer , 280 P.2d 444, 447 (Colo. 1955). See also Malouff v. Midland Fed. Sav. and Loan Ass’n , 509 P.2d 1240, 1243 (Colo. 1973) (recognizing that “[t]he common law doctrine of restraints on alienation is a part of the law in Colorado”).

16 . Friedman and Randolph Jr., supra note 8 at § 7:3.3. See also Malouff , 509 P.2d at 1243 (holding “that the question of the invalidity of a restraint depends upon its reasonableness in view of the justifiable interests of the parties”).

17 . Beck v. Giordano , 356 P.2d 264, 265 (Colo. 1960).

18 . Lindauer , 280 P.2d at 447.

19 . Fink v. Montgomery Elevator Co. of Colo. , 421 P.2d 735, 738 (Colo. 1966).

20 . Routt Cty. Mining Co. v Stutheit , 72 P.2d 692, 693 (Colo. 1937).

21 . Parr v. Triple L & J Corp. , 107 P.3d 1104 (Colo.App. 2004).

22 . Cafeteria Operators L.P. v. AMCAP/Denver Ltd. P’ship , 972 P.2d 276, 278 (Colo.App. 1998).

23 . Id. See also Basnett v. Vista Vill. Mobile Home Park , 699 P.2d 1343, 1346 (Colo.App. 1984) (holding that a landlord may not unreasonably refuse consent under a silent consent clause because that result “incorporates the principles of fair-dealing and reasonableness and also preserves freedom of contract”), rev’d on other grounds , 731 P.2d 700 (Colo. 1987).

24 . List v. Dahnke , 638 P.2d 824, 825 (Colo.App. 1981).

25 . Cafeteria Operators L.P. , 972 P.2d at 279.

26 . List , 638 P.2d at 825.

28 . Ring v. Mpath Interactive, Inc. , 302 F.Supp.2d 301, 305 (S.D.N.Y. 2004); Toys “R” Us, Inc., No. 88 C 10349, 1995 U.S. Dist. LEXIS 14878 at *111 (N.D.Ill. Sept. 29, 1995); Restatement (Second) of Prop.—Landlord and Tenant § 15.2 cmt. g (American Law Inst. 1976).

29 . E.g., Campbell v. Westdahl , 715 P.2d 288, 293 (Ariz.Ct.App. 1985).

30 . Friedman and Randolph Jr., supra note 8 at § 7:3.4 (citing cases).

31 . Cent. Bus. Coll. v. Rutherford , 107 P. 279, 280 (Colo. 1910); List , 638 P.2d at 825 (dictum).

32 . Kendall v. Ernest Pestana, Inc. , 709 P.2d 837, 845 (Cal. 1985).

33 . Id. at 845. See also Econ. Rentals, Inc. v. Garcia , 819 P.2d 1306, 1317 (N.M. 1991).

34 . Cafeteria Operators L.P. , 972 P.2d at 277.

36 . Id. at 279.

38 . List , 638 P.2d at 825.

39 . Toys “R” Us, Inc. , U.S. Dist. LEXIS 14878 at *124 (landlord’s refusal before it has relevant information that should be obtained in making the consent decision may be unreasonable).

40 . Shaffer, The Sublease and Assignment Deskbook at 80–81 (American Bar Ass’n 2d ed. 2016).

41 . Compare Parr , 107 P.3d at 1107 (affirming trial court’s ruling that the landlord unreasonably withheld consent where the landlord delayed consent, which caused the proposed assignees to withdraw their offer to purchase the business) with Toys “R” Us, Inc. , 1995 U.S. Dist. LEXIS 14878 at *124 (landlord’s refusal before it has relevant information that should be obtained in making the consent decision may be unreasonable).

42 . Fahrenwald v. LaBonte , 653 P.2d 806, 811 (Idaho Ct.App. 1982).

43 . Parr , 107 P.3d at 1106.

45 . Id. at 1107.

46 . Bert Bidwell Inv. Corp. v. LaSalle and Schiffer , P.C., 797 P.2d 811 (Colo.App. 1990).

47 . Id. at 811.

48 . Id. at 812.

50 . Toys “R” Us, Inc. , 1995 U.S. Dist. LEXIS 14878 at *115 (citations omitted) (“where a lease contains provisions giving further meaning to a reasonableness clause, the standard of reasonableness varies”); Shaffer, supra note 40 at 80–81.

51 . Golden Eye, LTC v. Fame Co. , No. 0603166/2007, 2008 N.Y. Misc 8571 at *16 (N.Y. Gen Term Jan. 16, 2008) (“the Court may not determine reasonableness if withholding consent is based on grounds that were not included in the letter refusing consent”).

52 . Shaffer, supra note 40 at 74–75.

53 . Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc. , 826 P.2d 710 (Cal. 1992).

54 . Lindauer , 280 P.2d at 447.

55 . Murphy v. Traynor , 135 P.2d 230, 231 (Colo. 1943).

56 . Shoemaker v. Shaug , 490 P.2d 439, 441 (Wash.Ct.App. 1971) (finding that the tenant was not in default of the anti-assignment provision because it could reassign the lease back to itself).

57 . La Casa Nino, Inc. v. Plaza Esteban , 762 P.2d 669, 672 (Colo. 1988) (citing Schneiker v. Gordon , 732 P.2d 603 (Colo. 1987)).

58 . Gordon Inv. Co. , 227 P.2d at 260–61 (tenant’s subletting was held a breach that permitted landlord to terminate the lease).

59 . Shakey’s Inc. v. Caple , 855 F.Supp. 1035, 1043–44 (E.D.Ark. 1994) (holding that the landlord was estopped from terminating a lease on account of an unapproved sublease because the landlord did not act promptly).

60 . Merkowitz v. Mahoney , 121 Colo. 38, 42 (Colo. 1949) (“It is the general rule that any act done by a landlord, with knowledge of an existing right of forfeiture, which recognizes the existence of the lease is a waiver of the right to enforce the forfeiture”); Werner v. Baker , 693 P.2d 385, 387 (Colo.App. 1984) (“the lessor’s acceptance of rent accruing after the breach of an anti-assignment clause, with knowledge of the breach, constitutes a waiver of the right to terminate the lease for breach of that clause”). Cf. Nouri v. Wester & Co. , 833 P.2d 848, 851 (Colo.App. 1992) (holding that waiver of conditions against assignment by accepting rent did not carry over to other provisions in the lease).

61 . La Casa Nino, Inc. , 762 P.2d at 672.

62 . Carma Developers (Cal.), Inc. , 826 P.2d 710.

63 . Schneiker , 732 P.2d at 611.

64 . Friedman and Randolph Jr., supra note 8 at §§ 7:5.1 and 7:7.1.

65 . Tiger Crane Martial Arts Inc. v. Franchise Stores Realty Corp. , 235 A.D.2d 994, 995 (N.Y.App.Div. 1997) (“It is well settled that where, as here, a sublease is expressly made subject to the terms of a master lease, the subtenant has no legal right to compel the tenant to exercise an option for renewal of the entire demised premises in order to permit the subtenant to exercise an option for renewal of its subleased premises, absent proof of an agreement on the part of the tenant to exercise its option to renew for the benefit of the subtenant or evidence of special circumstances entitling the subtenant to such relief”).

66 . Burgess Pic-Pac, Inc. v. Fleming Cos. , 190 W. Va. 169, 175 (W.Va. 1993) (discussing liability of sublandlord to subtenant for failure to exercise renewal option after request from subtenant).

67 . Senn, Commercial Real Estate Leases: Preparation, Negotiation, and Forms , § 13.14 (Wolters Kluwer 6th ed. 2019).

68 . 11 USC § 1107.

69 . 11 USC § 365(a).

70 . 11 USC § 365(f)(2)(B).

71 . 11 USC § 365(d)(3).

72 . In re DB Capital Holdings, LLC , 454 B.R. 804, 816 (Bankr. D.Colo. 2011) (“waivers, unless they were part of a previous bankruptcy proceeding . . . should not be enforced”).

73 . NLRB v. Bildisco & Bildisco , 465 U.S. 513, 528 (1984); 11 USC § 502(b)(6).

74 . In re Shane Co. , 464 B.R. 32, 38–41 (Bankr. D.Colo. 2012) (discussing damages claim under 11 USC § 502(b)(6)).

75 . 11 USC § 365(b)(1).

76 . 11 USC § 365(f); In re Bricker Systems, Inc. , 44 B.R. 952 (Bankr. E.D. Wis. 1984) (recognizing that § 365(f) invalidates restrictions on assignment of contracts or leases by a debtor or trustee and allows assignment of assumed contracts at a later date).

77 . In re Federated Dep’t Stores, Inc. , 135 B.R. 941 (Bankr. S.D. Ohio 1991); In re Martin Paint Stores , 199 B.R. 258 (Bankr. S.D.N.Y. 1996), aff’d , S. Blvd., Inc. v. Martin Paint Stores , 207 B.R. 57 (S.D.N.Y. 1997).

78 . In re Trak Auto Corp. , 367 F.3d 237, 244 (4th Cir. 2004) (internal citation omitted).

79 . In re Bradlee Stores, Inc. , No. 00-16033, 2001 U.S. Dist. LEXIS 14755 (S.D.N.Y. Sept. 20, 2001) (holding that restriction on assignment violated the anti-assignment provisions of § 365(f)); In re Rickel Home Ctrs., Inc. , 240 B.R. 826, 832 (D.Del. 1998) (striking restrictive use provision).

80 . In re Trak Auto Group , 367 F.3d at 242 (enforcing use provision concerning the sale of automobile parts and accessories in shopping center lease); In re J. Peterman Co. , 232 B.R. 366 (Bankr. E.D.Ky. 1999) (rejecting assignment of shopping center lease where proposed assignment would violate radius restriction in lease and assignee did not sell similar merchandise as the original tenant). But see In re Toys “R” Us, Inc. , 587 B.R. 304, 307 (Bankr. E.D.Va. 2018) (overruling landlord’s objection to the debtor’s assignment on the grounds that it would violate the exclusivity provision of another lease in the shopping center and would disrupt the shopping center’s tenant mix and balance).

81 . Friedman and Randolph Jr., supra note 8 at § 7:1.1.

82 . In re Ames Dept. Stores, Inc. , 127 B.R. 744, 752–54 (Bankr. S.D.N.Y. 1991) (discussing rights of landlord to protect the tenant mix at the shopping center in the context of the lease and a subsequent bankruptcy filing of the tenant).

83 . Carma Developers (Cal.), Inc. , 826 P.2d 710 (upholding the landlord’s contractual right to capture excess rent).

84 . For an interesting discussion on the assignability of rights of first refusal, see Mitchell, “Can a Right of First Refusal Be Assigned?” 985 U. Chi. L. Rev. (2001).

As these cases illustrate, if a landlord wishes to withhold consent absent a sole and unconditional contractual right to do so, it must have fact-based reasons for doing so and cannot arbitrarily withhold or delay consent.

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Permitted Transferees: What a Commercial Tenant Needs to Know When Negotiating the Assignment Clause

February 27, 2020

Are you a business owner or franchisee?

Will you be negotiating a lease in the foreseeable future?

Can you see your business model evolving during the lease term?

If the answer to these questions is “yes”, here is what you need to know when negotiating the transfer provisions in your next commercial lease.

What is the Assignment Clause and When is it Triggered?

Every commercial lease contains an assignment provision that lays out the landlord’s and the tenant’s rights and obligations in the event that the tenant seeks to “assign” the lease.

An “assignment” can occur in two scenarios:

Assignment of Lease : The first, and most common to lay people, occurs when the original tenant transfers and grants all of its rights and obligations under the lease to a third party, and the new tenant explicitly accepts these rights and obligations as its own and occupies the leased space.

Transfer of Ownership Interests in Tenant Entity : The second occurs when the tenant entity transfers its stock, membership or partnership interests (depending on whether the tenant entity is a corporation, limited liability company or partnership) to a third party entity, resulting in a change in ownership. In this scenario, the tenant under the lease remains the same — the transfer occurs internally within the tenant’s corporate structure.

Although the transfer that takes place in the second scenario does not seem like a traditional “assignment” (because the existing tenant remains in the space), most leases treat changes in control of the tenant entity as such. What constitutes a “change in control” that triggers an assignment, however, is negotiable. Typically, a transfer of a majority (51% or more) of the tenant’s stock, membership or partnership interests will suffice.

What do Landlords Typically Require to Effectuate an “Assignment”?

What a landlord requires to effectuate an “assignment” varies depending on how tough the landlord is and how much bargaining power it has. Below are several concepts you will typically encounter in a landlord’s form of lease.

Landlord Notice : Almost every commercial landlord will require a tenant to give it notice of any assignment of the lease. Landlords want to stay informed, which is not unreasonable.

Landlord Consent : In addition to notice, the landlord will often condition the assignment on its prior written consent. The key here is the standard of discretion imposed on the landlord — that is, whether the landlord must be “reasonable” in granting its consent, or whether it has “sole discretion” to do so. A tenant should push for the “reasonable” standard so that the landlord does not have the liberty to deny the tenant’s request for any or no reason at all, and should also negotiate to receive the Landlord’s decision promptly.

In determining whether to grant consent to an assignment, a landlord’s goal is to ensure that the proposed assignee will be able to satisfy the tenant’s obligations under the lease. As such, a landlord typically requires the submission of (1) a statement indicating the name and address of the proposed assignee, the nature of its business and the proposed uses of the leased space, (2) the proposed assignee’s most recent financial statements, and (3) an assignment and assumption agreement, stating that (a) the proposed assignee takes on all of the current tenant’s obligations under the lease and (b) the current tenant agrees to remain fully liable for the performance of all of the assignee’s obligations thereunder.

A more aggressive landlord will expressly condition its consent on the presence or absence of certain circumstances, such as: (1) the tenant not being in default under the lease, (2) the tenant not publicly advertising the space for a rental rate lower than the rent then being paid by the tenant, (3) the proposed assignee being financially responsible to the extent required for payment of rent and for successfully operating the business, (4) the proposed assignee having a net worth equal to or greater than that of the tenant, (5) the proposed assignee having a minimum amount of years of successful experience in the field of business to be conducted by it in the leased space, (6) the proposed assignee not being an entity with whom the landlord is then or has recently been negotiating to lease space, and (7) the proposed assignment being made in connection with the tenant’s sale to the proposed assignee of its business then being conducted in the leased space.

Payment of Monies : Also common are provisions requiring the tenant to reimburse the landlord for all of the reasonable costs incurred by it in connection with an assignment, including attorneys’ fees. If a tenant asks its landlord to engage an attorney to review assignment documents, it is only fair that the tenant pays for such costs. However, the tenant should negotiate a cap on these costs.

Sometimes the landlord will also require the proposed assignee to put up additional security, but this provision only passes muster when the proposed assignee is a risky one, making the additional security requirement reasonable.

Less common are instances in which the landlord requires the tenant to pay it a certain percentage of the entire gross consideration that the tenant receives from the proposed assignee (if any) in connection with the assignment, whether it be the monies received in selling the business or those received in a stock transfer.

Right of Termination / Space Recapture : Occasionally, a tenant will encounter a provision stating that upon receipt of the tenant’s request to assign, the landlord will have a right to terminate the lease and recapture the space. In other words, merely giving notice of the intent to assign triggers a landlord’s termination/recapture right. This is worst-case scenario and the tenant should negotiate its way out of such a provision.

What Should a Tenant Push For When Negotiating the Transfer Provisions?

Given the many conditions typically imposed by a landlord to effectuate an “assignment”, a tenant should push to incorporate the “permitted transferee” concept into its lease. A “permitted transferee” is an entity to which the tenant is permitted to carry out a transfer without the landlord’s prior written consent.

Transfers to a “permitted transferee” are not deemed “assignments” under the lease. Therefore, the onerous assignment requirements outlined above are not triggered, allowing the tenant to proceed with a transfer to certain pre-approved entities without having to fulfill any obligations under the lease (other than providing the standard notice to the landlord).

Commonly used examples of “permitted transferees” include: (1) the tenant’s parent, or any of its subsidiaries or affiliates, (2) an entity into which or with which the tenant is merged, consolidated or reorganized, (3) an entity to which all or substantially all of the tenant’s assets, stock or other equity interests are transferred, and (4) the tenant’s franchisor or another franchisee.

Can you see your business model evolving during the term of your next lease? If the answer is “yes”, you should negotiate with your landlord to incorporate the “permitted transferee” concept into your lease. The carve-out will work to save you much time and resources in operating your business.

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Assignment and Consent Standards in Commercial Leases

Mar 6, 2020

Assignment provisions in commercial leases are heavily negotiated and very important to both landlords and tenants. This article presents a brief overview of the assignment provision in commercial leases, both office and retail.

Assignment provisions in commercial leases are heavily negotiated and very important to both landlords and tenants. When a tenant’s interest in a lease is assigned, the tenant is transferring its entire leasehold interest and 100% of the leased premises to a third party for the entire remaining term of the lease. For the tenant, the assignment provision represents a potential exit strategy, dependent of course on the local market, and increased flexibility for future needs. For the landlord, the assignment offers greater security for its revenue stream and hopefully the avoidance of a tenant bankruptcy or default while keeping its building occupied. The tenant’s desire for flexibility and the landlord’s need for control is where the negotiations are focused. This article presents a brief overview of the assignment provision in commercial leases, both office and retail, with particular attention on the laws of Maryland, Virginia and the District of Columbia. The landlord’s standard for providing consent to a request to an assignment will be reviewed, and we will conclude by offering suggested language.

What If The Lease Does Not Contain An Assignment Provision?

The law traditionally favors the free alienation of property. Therefore, under the laws of almost every state, if the lease is silent on whether the landlord’s consent to an assignment is required, then the commercial tenant has the right to assign its interest. This is true in Maryland, Virginia and the District of Columbia. Given this baseline, almost every lease form will have a detailed provision setting forth the assignment process. Note also, however, that in most states it is also enforceable for a commercial lease to have an outright prohibition against assignments. Such a provision would likely be a non-starting deal point for most sophisticated tenants.

What Does Reasonable Mean?

If a lease simply provides that the tenant requires landlord’s consent to an assignment, but does not include the standard for giving or withholding that consent, then in many states the implied standard is that the landlord’s consent may not be unreasonably withheld. Historically this was the minority view, with the historical rule allowing the landlord to withhold consent for any reason. The implied duty of reasonableness is now more the norm as more states adopt this position when presented with the issue. There is express case law establishing this rule in Maryland, and most courts in Virginia and Washington, DC will imply such a covenant of good faith and fair dealing. Most states, though, do allow a landlord the sole right to grant or withhold its consent if the lease clearly expressly provides, and in Maryland the lease must specifically state that the landlord’s consent may be granted or withheld in the sole and absolute subjective discretion of the landlord. Again though, a sophisticated tenant with any leverage should never agree to such a provision.

Most negotiated leases will instead contain a provision requiring that landlord’s consent to an assignment is required, but such consent will not be unreasonably withheld. The tenant will likely also try to include landlord’s obligation to not unreasonably delay or condition its consent. A short clause without further defining what constitutes “reasonableness” generally favors the tenant, and landlords typically prefer including specific standards as to the criteria it can consider when reasonably deciding whether or not to consent to an assignment. Without such specificity, defining “reasonable” is difficult as the landlord and tenant clearly will have differing viewpoints and it may be left as a factual question to be decided in litigation. The typical definition (set forth in the Restatement (Second) of Property) would be that of a reasonably prudent person in the landlord’s position exercising reasonable commercial responsibility.

Absent a detailed provision listing the criteria a landlord can consider when reasonably reviewing a request to assign, a landlord is typically found to be considered reasonable if it considers certain general broad factors. First, the landlord reviews the assignee’s proposed use. In a retail setting, the landlord will be concerned whether the proposed use fits with the existing center and/or violates any existing exclusives or insurance requirements. In an office setting, the landlord might review the expected traffic and wear and tear on the building. Second, the landlord will consider the creditworthiness of the assignee. The landlord (and the assignor) will want to be confident that the assignee is capable of performing tenant’s obligations under the lease and a large creditworthy tenant increases the value of the asset. The assignor might argue that a strict financial test (such as a minimum net worth, for example) is unfair since the assignor is likely not being released upon the assignment and the landlord can still pursue the assignor in the event of a default. Third, the landlord will review the experience and history of the assignor. As mentioned above, landlords instead prefer a detailed list setting forth the many factors that they can include as part of reasonably reviewing a request for a lease assignment.

Without further establishing the criteria, the landlord puts itself at risk of a challenge by the tenant that a denial of a consent is unreasonable.

In defining “reasonable,” courts typically do not allow a landlord to deny or condition consent to an assignment based purely on economic reasons where the landlord results in substantially increasing what it was entitled to under the lease. In Washington, DC, there is well established case law holding that it is unreasonable for a landlord to withhold consent solely to extract an economic concession or improve its economic position. For example, a court would not consider it reasonable for a landlord to condition its consent on the assignee paying a greatly increased rent. Instead, as discussed below, landlords should look to protect their interests in a market of increasing rents by providing for either the sharing of excess rentals or a right to recapture.

What Are Typical Provisions In an Assignment Clause?

As discussed above, tenants generally prefer a short assignment provision simply requiring the landlord to not unreasonably withhold, condition or delay its consent to an assignment. But most leases are drafted by landlords, and over the years the assignment provisions have evolved to contain many typical provisions in addition to further defining “reasonableness,” including the following below.

• Sharing of Excess Rents. Since many states do not permit a landlord to condition its consent on improving its economic position (e. g. , by increasing the rent), most leases instead contain a provision where the landlord is entitled to all or a portion of the profits. The profits may mean increased rent, or it may even be construed more broadly to consider the value of the location in a sale of the tenant’s business. The landlord’s argument is that it doesn’t want the tenants competing in the real estate market. The tenant should push back here, and certainly try to lower the percentage shared, carve out any consideration received in the sale of tenant’s business, and only share profits after all of the tenant’s reasonable costs incurred in connection with the assignment were first deducted.
• Corporate Transfers. Since a purchase of the entity constituting tenant is likely not deemed an assignment under the law, most leases make clear that any such corporate sale, including the sale of either a controlling interest in the stock or substantially all of the assets of the tenant, is deemed an assignment for purposes of the lease. The tenant should carve out permitted transfers for typical mergers and acquisitions under certain conditions, and also carve out routine transfers of stock (or other ownership interests) between existing partners or for estate planning purposes. The landlord will likely accept a permitted transfer concept provided they receive adequate notice and the successor entity succeeds to all of the assets of the original tenant with an acceptable net worth.
• Assignment Review Fee. Most landlords include in their form lease the requirement that the tenant reimburse them for legal and administrative expenses incurred in reviewing the request for consent and preparing the assignment. The tenant clearly wants to keep these fees reasonable and in keeping with the local market.
• Recapture Rights. Landlords like to include the express right to recapture the premises in the event the tenant comes to it to request a consent for an assignment. A recapture clause allows the landlord to terminate the lease if market rents have increased or if it needs the space for another use. Sophisticated tenants should push back here as much as leverage allows, try to limit the time periods, and if nothing else try for the right to nullify the recapture by rescinding its request for the consent.
• Tenant’s Remedy. To protect themselves from claims for damages from the tenant if the landlord withholds its consent to a requested assignment, landlords often include a provision where the tenant waives its rights to monetary damages in such a situation and can only seek injunctive relief. The tenant should try to delete this provision, or at least, if leverage permits, provide for the right to seek damages if the landlord is subsequently found to have acted in bad faith.

Assignment provisions are heavily negotiated and both the commercial landlord and tenant need to be advised to the applicable local law and know the market for a comparable transaction. ( Note: The author represents office and retail landlords and tenants throughout Virginia, Maryland and the District of Columbia.) Sample reasonableness provisions for both office and retail uses are copied below for reference.

Retail Lease

Landlord and Tenant agree, by way of example and without limitation, that it shall be reasonable for Landlord to withhold its consent if any of the following situations exist or may exist: (i) In Landlord’s reasonable business judgment, the proposed assignee lacks sufficient business experience to operate a business of the type permitted under this Lease and to a quality required under this Lease; (ii) The present net worth of the proposed assignee is lower than that of Tenant’s as of either the date of the proposed assignment or the date of this Lease; (iii) The proposed assignment would require alterations to the Premises affecting the Building’s systems or structure; (iv) The proposed assignment would require modification to the terms of this Lease, or would breach any covenant of Landlord in any other lease, insurance policy, financing agreement or other agreement relating to the Shopping Center, including, without limitation, covenants respecting radius, location, use and/or exclusivity; (v) The proposed assignment would conflict with the primary use of any existing tenant in the Shopping Center or any recorded instrument to which the Shopping Center is bound; and/or (vi) The proposed assignment or subletting would result in a reduction in the Rent collected by Landlord during any portion of the term of this Lease.

Office Lease

Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply: (i) The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building; (ii) The Transferee intends to use the Premises for purposes which are not permitted under this Lease; (iii) The Transferee is a governmental agency; (iv) The Transfer occurs prior to the first anniversary of the Lease Commencement Date; (v) The Transferee has a net worth of less than $10,000,000.00; (vi) The proposed Transfer would cause a violation or trigger a termination right of another lease for space in the Building; or (vii) Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, (i) occupies space in the Building at the time of the request for consent, or (ii) is negotiating with Landlord to lease space in the Building at such time, or (iii) has negotiated with Landlord during the six (6)-month period immediately preceding the Transfer Notice.

Reprinted with permission from the March edition of the Commercial Leasing Law & Strategy© 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected] .

• John G. Kelly

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Assignment of Lease

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What is an assignment of lease.

The assignment of lease is a title document that transfers all rights possessed by a lessee or tenant to a property to another party. The assignee takes the assignor’s place in the landlord-tenant relationship.

You can view an example of a lease assignment here .

How Lease Assignment Works

In cases where a tenant wants to or needs to get out of their lease before it expires, lease assignment provides a legal option to assign or transfer rights of the lease to someone else. For instance, if in a commercial lease a business leases a place for 12 months but the business moves or shuts down after 10 months, the person can transfer the lease to someone else through an assignment of the lease. In this case, they will not have to pay rent for the last two months as the new assigned tenant will be responsible for that.

However, before the original tenant can be released of any responsibilities associated with the lease, other requirements need to be satisfied. The landlord needs to consent to the lease transfer through a “License to Assign” document. It is crucial to complete this document before moving on to the assignment of lease as the landlord may refuse to approve the assignment.

Difference Between Assignment of Lease and Subletting

A transfer of the remaining interest in a lease, also known as assignment, is possible when implied rights to assign exist. Some leases do not allow assignment or sharing of possessions or property under a lease. An assignment ensures the complete transfer of the rights to the property from one tenant to another.

The assignor is no longer responsible for rent or utilities and other costs that they might have had under the lease. Here, the assignee becomes the tenant and takes over all responsibilities such as rent. However, unless the assignee is released of all liabilities by the landlord, they remain responsible if the new tenant defaults.

A sublease is a new lease agreement between the tenant (or the sublessor) and a third-party (or the sublessee) for a portion of the lease. The original lease agreement between the landlord and the sublessor (or original tenant) still remains in place. The original tenant still remains responsible for all duties set under the lease.

Here are some key differences between subletting and assigning a lease:

• Under a sublease, the original lease agreement still remains in place.
• The original tenant retains all responsibilities under a sublease agreement.
• A sublease can be for less than all of the property, such as for a room, general area, portion of the leased premises, etc.
• Subleasing can be for a portion of the lease term. For instance, a tenant can sublease the property for a month and then retain it after the third-party completes their month-long sublet.
• Since the sublease agreement is between the tenant and the third-party, rent is often negotiable, based on the term of the sublease and other circumstances.
• The third-party in a sublease agreement does not have a direct relationship with the landlord.
• The subtenant will need to seek consent of both the tenant and the landlord to make any repairs or changes to the property during their sublease.

Here is more on an assignment of lease here .

Parties Involved in Lease Assignment

There are three parties involved in a lease assignment – the landlord or owner of the property, the assignor and the assignee. The original lease agreement is between the landlord and the tenant, or the assignor. The lease agreement outlines the duties and responsibilities of both parties when it comes to renting the property. Now, when the tenant decides to assign the lease to a third-party, the third-party is known as the assignee. The assignee takes on the responsibilities laid under the original lease agreement between the assignor and the landlord. The landlord must consent to the assignment of the lease prior to the assignment.

For example, Jake is renting a commercial property for his business from Paul for two years beginning January 2013 up until January 2015. In January 2014, Jake suffers a financial crisis and has to close down his business to move to a different city. Jake doesn’t want to continue paying rent on the property as he will not be using it for a year left of the lease. Jake’s friend, John would soon be turning his digital business into a brick-and-mortar store. John has been looking for a space to kick start his venture. Jake can assign his space for the rest of the lease term to John through an assignment of lease. Jake will need to seek the approval of his landlord and then begin the assignment process. Here, Jake will be the assignor who transfers all his lease related duties and responsibilities to John, who will be the assignee.

You can read more on lease agreements here .

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Assignment of Lease From Seller to Buyer

In case of a residential property, a landlord can assign his leases to the new buyer of the building. The landlord will assign the right to collect rent to the buyer. This will allow the buyer to collect any and all rent from existing tenants in that property. This assignment can also include the assignment of security deposits, if the parties agree to it. This type of assignment provides protection to the buyer so they can collect rent on the property.

The assignment of a lease from the seller to a buyer also requires that all tenants are made aware of the sale of the property. The buyer-seller should give proper notice to the tenants along with a notice of assignment of lease signed by both the buyer and the seller. Tenants should also be informed about the contact information of the new landlord and the payment methods to be used to pay rent to the new landlord.

You can read more on buyer-seller lease assignments here .

Get Help with an Assignment of Lease

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Meet some of our Assignment of Lease Lawyers

I grew up in Beaumont, Texas. I attended Baylor University for college and the The University of Texas School of Law for law school. I gained extensive experience in many areas of transactional law through my former position as corporate counsel at National Western Life Insurance Company and my current position as an Associate at Nance & Simpson, LLP.

Antonella C.

I am a business transactional & trademark attorney with 15 years experience in the law firm and in-house settings. I am barred in Pennsylvania and New Jersey. I currently own my own practice serving businesses and entrepreneurs with business transactional and IP law.

Trusted contracts attorney specializing in real estate and business law. I handle leases, land purchase contracts, investment valuations, cease and desist letters, and operating agreements.

I am a Berkeley Law 2020 graduate. I have experience working in finance and operations, plaintiff and defense litigation, and have been involved in multiple start-ups.

Jeanilou M.

Jeanilou G.T. Maschhoff has over 20 years of comprehensive business operations, finance, and development experience in addition to being a licensed attorney in California and Hawaii. She zealously works as a Trusted Advisor, Business/Brand Consultant, and Advocate for small businesses, non-profit organizations, and personal brands. She is dedicated to helping female business owners and professionals in the entertainment, beauty, fashion, and wellness industries make their goals a reality. She uses her diversified expertise to provide a holistic approach to addressing business and legal needs. Acting as a trusted advisor and outsourced general counsel, she assists on an array of business and personal matters. Passionate about social justice and assisting underrepresented populations, Jeanilou started her legal career working in the non-profit sector working towards access to justice and gender equity. She continues to assist non-profit organizations in many capacities and actively looks to partner businesses with charitable causes, creating a synergistic effect that benefits not only the organizations involved but our society as a whole. As an early adopter of the virtual practice of law, Jeanilou has been assisting law firms and solo practitioners adjust to the remote delivery of legal services and helping businesses explore Web 3.0.

30 year practitioner. Seasoned but not old. Wide variety of practice areas, including criminal, domestic and civil law.

Christopher L.

Christopher M. Lapinig is an experienced attorney, admitted to practice in California and New York, with extensive experience in civil litigation at the trial and appellate levels in various areas of the law, including, but not limited to, constitutional law, labor and employment, and consumer protection. He also has experience in immigration law and with administrative wage-and-hour claims. Chris currently works in impact litigation, and he also teaches legal writing at the University of Southern California. Chris also has significant experience in journalism and lay writing; his work has been published in The New York Times, The Atlantic, CNN, and other prominent media outlets. Born and raised in Queens, New York, Chris previously served as a Deputy Attorney General in the Consumer Protection Section at the California Department of Justice. He also served as a Skadden Fellow and Staff Attorney in the Impact Litigation Unit at Asian Americans Advancing Justice – Los Angeles, where his work focused on providing holistic and culturally sensitive legal services to victims and survivors of human trafficking in the Filipino community. At Advancing Justice-LA, Chris also litigated voting rights and immigrant rights cases. At the beginning of his legal career, Chris served as a law clerk to the Honorable Denny Chin of United States Court of Appeals for the Second Circuit and was the first Filipino American Clerk for the Honorable Lorna G. Schofield of United States District Court for the Southern District of New York, the first federal Article III judge of Filipino descent in United States history. Chris was also a Fulbright Research Scholar in the Philippines. A Phi Beta Kappa member, Chris graduated summa cum laude from Yale College and earned a B.A. with Distinction in Linguistics and with Distinction in Ethnicity, Race and Migration. In college, Chris served as President of Kasama: The Filipino Club at Yale, Moderator of the Asian American Students Alliance, and Head Coordinator of the Asian American Cultural Center. Chris returned to Yale for law school and received his J.D. in 2013. In law school, Chris served as the Co-Chair of the Asian Pacific American Law Students Association, the Co-Coordinator of the Critical Race Theory Conference, the inaugural Diversity Editor of the Yale Law Journal, and the Founding Coordinator of the Alliance for Diversity. He was a member of the Worker and Immigrant Rights’ Advocacy Clinic.

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Assignment and Subletting Clause (Commercial Lease) (Pro-Landlord) | Practical Law

Assignment and Subletting Clause (Commercial Lease) (Pro-Landlord)

Practical law standard clauses w-005-1111  (approx. 17 pages).

Commercial lease assignments: A guide for businesses

Business owners often consider commercial lease assignments to enhance flexibility, mitigate financial burdens, or adapt to evolving operational requirements. 

The work landscape, particularly in cities like London, is also evolving with the widespread adoption of remote and hybrid models, with many tenants seeking to streamline their footprints and reduce overhead costs.

Whether your business is looking for a more suitable space or navigating market fluctuations, this article will give you an overview of the lease assignment process and the essential legal aspects to consider.

What is the assignment of a lease?

The assignment of a lease refers to the legal process through which a tenant transfers their lease obligations and rights to another party, known as the assignee. This strategic move allows businesses to exit their premises before the lease term ends, with the assignee assuming responsibility for complying with the lease terms and obligations.

Businesses may consider lease assignment for various reasons, such as relocation, financial constraints, or changes in business needs. For instance, a company experiencing rapid growth may seek more extensive premises, making lease assignment an attractive option to exit the current arrangement.

What role does a solicitor play?

Understanding the legal complexities is vital when considering the assignment of a commercial lease. In this process, solicitors offer expert advice and can negotiate with the landlord to secure favourable terms within the assignment agreement, safeguarding the client's interests. 

Their pivotal role extends to drafting and finalising essential legal documents associated with lease assignments, such as:

• Licence to assign: A solicitor can assist in drafting this document, ensuring that it covers all necessary conditions and terms for the assignment, meets legal requirements, and protects the interests of both parties.  
• Rent deposit deed: Solicitors can draft the rent deposit deed, specifying the details of the deposit arrangement, its purpose, and the conditions under which the landlord can use the deposit, providing legal clarity for both parties.  
• Authorised guarantee agreement (AGA): Solicitors are instrumental in creating an AGA, outlining the legal commitment by the outgoing tenant to guarantee the new tenant's performance. They ensure that the agreement is comprehensive and legally sound, protecting the interests of the landlord and the outgoing tenant.

Avoiding the legal pitfalls of lease assignments

While every commercial lease assignment is unique, several legal aspects require careful consideration.

1. Leasehold covenants: Ensuring compliance 

Understanding leasehold covenants is essential in the lease assignment process as it involves recognising and complying with the agreed-upon obligations and restrictions outlined in the lease agreement. These covenants dictate how the property can be used, any alterations or improvements allowed, and other conditions the current and potential tenants must adhere to. 

For example, if a leasehold covenant stipulates that the premises can only be used for office purposes, you cannot assign the lease to a manufacturing company.

Failure to understand and meet these covenants could lead to complications, including the landlord's refusal to consent to the assignment or potential legal issues. Comprehending these covenants is essential for a smooth and legally compliant lease assignment.

2. Securing the landlord's consent: A prerequisite

Before proceeding with a lease assignment, obtaining the landlord's consent is paramount. This process involves submitting a formal request providing details about the proposed assignee and their financial stability.

While landlords cannot unreasonably withhold consent, specific lease terms may give them grounds to do so. Understanding the particular conditions for refusal is crucial, so it is important to seek legal advice as soon as possible.

3. Liabilities when assigning a commercial lease

Understanding liabilities when assigning a lease is crucial for business owners as it directly impacts their ongoing responsibilities and potential financial obligations. Transferring a lease doesn't automatically absolve the original tenant of all liabilities; they may still be held accountable if the new tenant defaults on payments or breaches lease terms. 

An authorised guarantee agreement (AGA) is a legal commitment often used in the context of commercial lease assignments. When a tenant assigns its lease to a new tenant, the outgoing tenant (assignor) may be required to provide an AGA. This agreement serves as a guarantee by the original tenant to the landlord, ensuring that the obligations of the new tenant (assignee) under the lease will be fulfilled.

The AGA means that if the new tenant defaults on the lease obligations, the outgoing tenant remains liable, guaranteeing the landlord a level of financial security. The original tenant can be pursued for any unpaid rent or other breaches of the lease terms by the new tenant. The AGA provides a legal mechanism for the landlord to seek redress from the outgoing tenant if issues arise with the assigned lease. 

Clear comprehension of these liabilities ensures informed decision-making and risk mitigation during the lease assignment process.

4. Navigating regulatory changes

The evolving regulatory landscape, particularly factors like Energy Performance Certificates (EPCs), can add additional challenges to lease assignments. For example, if you took on a lease before Minimum Energy Efficiency Standards (MEES) came into effect on April 1, 2018, the regulations did not apply at the time of the lease's inception. However, if you are now considering assigning the lease, MEES regulations would be applicable. 

A landlord may be less willing to agree to the lease assignment if it becomes essential to ensure that the property meets the required EPC standards to comply with the current regulations. 

5. Formalising with Land Registry: A vital step

Registering an assignment with the Land Registry is an important step in the lease assignment process. If a lease is granted with a term of over seven years, it must be registered to record the change of tenant officially. 

Failure to complete this registration can have significant consequences, including potential challenges to the validity and enforceability of the assignment. 

What are the alternatives to assigning a commercial lease?

When considering an exit from a commercial lease, it's crucial to recognise that assignment is just one of several options. Exploring these options is vital, and seeking guidance from a solicitor ensures a comprehensive understanding of the available choices.

• Assignment vs. subletting: Assignment involves permanently transferring your lease obligations to a new tenant. On the other hand, subletting a commercial property allows you to lease a part of your space to another party, retaining your responsibility for the entire lease.  
• Taking advantage of a 'break clause': A break clause is a provision in the lease allowing either party to terminate the agreement early, typically at predefined intervals. It provides a strategic exit, but conditions and notice periods must align with the lease terms.  
• Early termination with landlord's consent: Seeking your landlord's agreement to terminate the lease prematurely can be challenging. It requires negotiations and may involve financial considerations. Legal advice is essential to navigate this complex process and safeguard your interests.

Business owners can make informed decisions that align with their strategic objectives by understanding the intricacies, exploring alternatives, and leveraging legal expertise.

Commercial lease expertise

Our team of experienced commercial property solicitors is dedicated to guiding you through the lease assignment process. Every business has unique needs, so we offer tailored advice that aligns with your objectives. 

In addition to lease assignments, we can provide guidance on alternative options for ending a commercial lease, such as subletting, break clauses, and lease termination. 

With solicitors in London, Brighton, East Sussex, and Cumbria, we assist commercial landlords and tenants nationwide.

Looking to assign a commercial lease?

You might also like to read:

Subletting strategies: maximising flexibility in commercial leases, how to surrender a commercial lease: a guide for landlords and tenants.

How to end a commercial lease early: A quick guide

Repair clauses in commercial leases: what tenants need to know.

• Practical Law

Leases: Assignments

Practical law uk practice note 8-422-1211  (approx. 21 pages).

• Leases and Licences to Occupy
• Assignments, Variations, Surrenders and Termination - Land and Buildings

THE LANDLORD'S PERSPECTIVE: CONSENT TO ASSIGNMENT AND ASSUMPTION OF LEASE

Commercial real estate landlords commonly face this scenario: one of your tenants sends you a letter indicating that it has sold its business to a third party and has assigned the lease to the third party. Your tenant’s letter requests that you countersign and return the letter acknowledging your consent to the assignment of the lease to the third party. What should you do in response to the tenant’s request?

Step One : Evaluate the lease to determine the landlord’s and tenant’s rights and obligations concerning an assignment of the lease by the tenant. Most landlord-oriented lease forms provide that the tenant shall not have the right to assign the lease (or sublet any part of the premises) without the prior written consent of the landlord. Such lease forms also usually provide that the landlord’s consent shall not be unreasonably withheld. Although reasonableness standards for consents are frequently subject to differences of opinion, most authorities would not consider a landlord to be acting unreasonably if there is any uncured default of tenant or the proposed assignee is either an entity with which the landlord is already in negotiation for other space. The landlord may also reasonably withhold if the lease would subject the premises to a use that would involve increased personnel or wear upon the building, violate any exclusive right granted to another tenant, require modification of the building in order to comply with building code or other governmental requirements or violate the permitted use clause in the lease.

Most leases will require that the tenant notify the landlord prior to the commencement date of the assignment. The tenant must also identify the name of the proposed assignee, the relevant terms of the assignment and copies of financial reports and other relevant information. Additionally, most landlord-oriented leases provide that changes in control of the tenant entity are regarded as an assignment of the lease (and, therefore, trigger the assignment provisions of the lease).

Also, consider these questions. Does the lease specify whether the assigning tenant will remain directly and primarily responsible and liable for the payment of the rent and for compliance with all of its other obligations under the lease? Does the lease provide landlord with an option to terminate the lease or otherwise recapture the premises upon a request to assign the lease? If the landlord does not elect to terminate the lease or recapture the premises, does the lease provide the landlord with any rights to receive any additional rent or other consideration if the assignee is scheduled to pay rent to the original tenant (assignor) in excess of the amount of rent scheduled to be paid by the original tenant to the landlord pursuant to the lease? Does the lease require the tenant to pay to the landlord an assignment fee and/or require the tenant to reimburse the landlord for the landlord’s costs and expenses in investigating and considering any proposed or purported assignment of the lease?

Step Two : Verify whether any third parties have rights with respect to consenting to a prospective assignment of a lease and make sure to comply with such requirements, if any. Occasionally, mortgage loan-related documents or certain easements, covenants, conditions or development agreements burdening the subject property will limit rights to assign leases and/or provide to the mortgage holder consent to assignment rights in certain circumstances. Avoid inadvertently triggering a default with any third party by failing to comply with any such requirements.

Step Three : Evaluate the proposed form of Assignment and Assumption of Lease and modify as necessary. Assuming the landlord has reviewed and approved the financial reports and other relevant information concerning the proposed assignee and is not planning to exercise any termination or recapture right, under most circumstances, the landlord will be well served to modify the assignor’s/assignee’s form of Assignment and Assumption of Lease.

Most landlords will want an Assignment of Lease to include the effective date of the assignment; a comprehensive list of the underlying lease agreements and the parties; and an assignment clause describing the parties, what is being assigned and the consideration given. The Assignment will also cover a statement confirming that the assignor agrees to pay landlord a fee for the landlord’s review of the proposed assignment to assignee; representations by the assignor to landlord that the landlord is not in default under the lease, the assignor is receiving no “increased rent” from assignee that exceeds the rent payable to landlord for the premises, the assignor has no claims against landlord under the lease, and each person signing the assignment on behalf of the assignor has full authority and that the assignment binds the assignor entity; a landlord limitation of liability clause; and an accurate signature block for the assignor entity.

— Jay A. Gitles is a partner in the Real Estate Practice Group of Seyfarth Shaw LLP's Chicago office.

On Monday: Part II of “The Landlord's Perspective,” which includes the last step and a sample conesnt to assignment and assumption of lease clause.

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Commercial lease assignment: when can consent reasonably be refused?

Advice   |   25 June 2018

In this article, he delves a little deeper and considers when consent to such requests can reasonably be refused.

In a previous article , David Hacker, commercial property expert with Thackray Williams provided an overview of the rules governing requests from tenants for permission to assign a commercial lease. In this article, he delves a little deeper and considers when consent to such requests can reasonably be refused.

‘The law governing lease assignment is clear: consent to assign must be granted unless circumstances exist which make it reasonable for permission to be refused’, says David. ‘but what is not so clear is what sort of circumstances need to exist to meet the reasonableness requirement.’

The burden of proving that the refusal of consent is reasonable in any given case will always rest with the landlord, which makes taking legal advice at an early stage crucial.

Stipulations in the lease

Leases granted after 1 January 1996 will usually set out the circumstances in which consent to an assignment may be refused. These may include where, in the landlord’s reasonable opinion, it appears that the proposed new tenant will not be able to meet their liabilities under the terms of the lease, including where there is evidence to suggest that the new tenant will not be able to pay the rent.

It is also possible that the lease will stipulate the conditions that may be imposed where consent is given, such as the need for the outgoing tenant to enter an authorised guarantee agreement to secure the new tenant’s performance of the lease obligations, or a requirement that the new tenant pays a rent deposit.

A landlord who relies on the provisions of a lease in this way to justify the refusal of consent, or who is only willing to provide consent subject to the specified conditions, will not be in breach of the statutory duty to give consent. This is because the provisions relied on will have been agreed in advance and therefore the existing tenant will have known from the moment they signed up to the lease the hurdles they would have to overcome if they wish to assign.

Considerations outside of the lease

In addition to stipulations as to consent and conditions in the lease itself, a landlord may also be able to refuse consent on other grounds, or to impose other conditions, if in the circumstances it is reasonable to do so.

For leases entered before 1996, relying on considerations outside of the lease is the only way in which a refusal of consent, or the imposition of conditions, can be justified. This is because, prior to 1996, it was not possible for stipulations regarding these matters to be included within the lease itself. This makes it more difficult to be sure whether or not the reasonableness test is satisfied.

The main rule when seeking to rely on considerations not stipulated within the lease is that you cannot refuse consent, or seek to impose conditions, unless the reason for this has something to do with the relationship between you and the tenant and to things you expect may happen because of the proposed assignment. Examples of when this may be the case are detailed below.

In no circumstances can you use a request for consent as leverage to get any sort of advantage, for example by trying to get the existing tenant to agree to vary some aspect of the lease.

Examples of common scenarios

If the financial information provided by the proposed new tenant does not convince you that they will pay the rent due under the lease reliably, it should be reasonable to withhold consent. However, if, as part of the arrangements for assignment, provision has been made for the performance of the lease obligations by the new tenant to be guaranteed, then this is something which must be taken into account when assessing the request.

Before deciding what to do, you may want to inspect the property to check what sort of condition it is in. In a previous case which came before the courts, a landlord was held to be reasonable in refusing consent where the leased property was already in serious disrepair and they were not confident that the new tenant had the resources to deal with it. You should, however, be wary of relying on a breach of covenant as a reason for refusing consent because you will retain the right to pursue the existing tenant for this after the assignment has taken place. Minor breaches of the terms of the lease, in particular, will not be a reasonable ground for refusal.

You may be justified in taking the proposed new tenant’s intended use of the leased property into account. If you believe the intended use will breach the terms of the lease, then this should be a reasonable ground for refusing consent. Likewise, if you own a parade of shops, or the leased property is in a shopping centre, and there is a tenant mix policy in place to ensure a good range of uses, it will usually be reasonable to refuse consent to a tenant whose intended use does not fit with that policy.

Wherever reasonableness is involved, there are no hard and fast rules, which is why landlords faced with a request for consent to assignment need sound legal advice at the earliest possible opportunity. With the help of your solicitor you can ensure that you have access to all the information you need to make an informed decision and, where justifiable reasons for refusal exist, you can frame your objections appropriately and within a reasonable period.

For further advice about the assignment of a commercial lease, or for any other commercial property matter, please contact David Hacker.

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When your tenant wants to assign your commercial lease – what landlords need to know before withholding consent.

January 07, 2020

Many commercial real estate landlords would be surprised to learn that, under Florida common law, a tenant has the right to assign a lease without the landlord’s consent.  That right derives from the principle that the law generally favors free alienation of property.  

This common law right can, however, lawfully be restricted or eliminated by contract, and indeed, most landlords today include an express provision in their lease agreements prohibiting any assignment or subletting without the landlord’s prior written consent.  

Most such assignment provisions include language stating that the landlord’s consent will “not be unreasonably withheld.”  But what does that mean, exactly? 

According to at least one appellate court in Florida, it means a landlord cannot deny consent because it wishes to enter into an entirely new lease with the proposed subtenant or assignee to charge a higher rent than originally contracted.   See Fernandez v. Vazquez , 397 So.2d 1171, 1174 (Fla. 3d DCA 1981).  That’s because in every contract there is an implied covenant of good faith and fair dealing.  Lease agreements are, of course, contracts, which means this principle applies to them, too.  Thus, along with a denial based on the landlord’s desire to charge a higher rent than contracted for in the original lease, denying consent to an assignment because of personal taste, convenience or sensibility are considered arbitrary reasons that fail the tests of good faith and reasonableness under commercial leases.   See id.

Most importantly, however, a withholding of consent to assign a lease that fails the tests for good faith and commercial reasonableness constitutes a breach of the lease agreement that could put a landlord in the position of being sued by the tenant.   See id.   Courts have held a landlord’s refusal to consent to an assignment of the lease to a tenant who is acceptable by reasonable commercial standards to be an unreasonable exercise and thus violative of the lease.   Id.  

Some factors the jury will consider in applying the standards of good faith and commercial reasonableness—and thus, some factors a landlord should weigh in making its decision—include: 

(a) the financial responsibility of the proposed subtenant or assignee;

(b) the “identity” or “business character” of the subtenant or assignee (such as the proposed subtenant or assignee’s suitability for a particular building); 

(c) the need for alteration of the premises;

(d) the legality of the subtenant or assignee proposed use of the premises; and

(e) the nature of the occupancy (that is, whether it’s an office, factory, clinic, etc.). 

Id.  

Landlords most often encounter assignment requests when a commercial tenant wants to sell its business.  If this issue arises in your commercial real estate business and you’re considering withholding consent, be sure to check the particular assignment provision in your lease first and then consult with a lawyer.  

The AV-rated attorneys at Chane Socarras regularly handle real estate and commercial landlord/tenant disputes and litigation. For more information on this or other topics related to commercial landlord-tenant law,  click here to contact the business litigation firm of Chane Socarras, PLLC or call us at (561) 309-3190.

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Ending a Tenancy: What You Need to Know About Lease Assignments

There are many reasons for a tenant to decide they want out of a lease agreement; it could be a matter or preference or because of things that are beyond their control. Some of the most common reasons include:

(a) the business being sold

(b) the need for a bigger (or smaller) space

(c) issues with the neighbours (or even the landlord)

(d) job loss or relocation

(e) separation or divorce and discontinuance or transfer of business to ex-partner

Whatever the reason may be, the original tenant can’t just up and leave the property (without heavy recourse) without following proper procedure. Read on to learn more about how to properly assign your retail and/or residential leases in Victoria.

What does assignment of lease mean?

To assign a lease means what it says–the lessee or tenant finds and transfers their interest in leased premises to a new person or entity. The incoming tenant would then assume all the rights and responsibilities of the original tenant under the existing lease agreement. Be careful, though; this doesn’t always mean that the current tenant is released from all their obligations.

How do you assign a lease?

Assignment of retail leases.

Generally, assignment of lease provisions will be set out in the lease agreement. That needs to be followed in addition to the Retail Lease Act 2003 (VIC) . In most circumstances, Part 7 (assignment and termination of retail lease) will provide you a direction as to how to assign a retail lease.

Section 61 of the Act deals with procedures for obtaining consent to an assignment of lease. These include:

     (a) the current tenant’s request for a transfer of the lease must be in writing

     (b) information about the financial resources and business experience of the proposed tenant

Give the prospective tenant an updated copy of a disclosure statement.

To request consent from a landlord to transfer the lease:

• the current tenant asks the landlord to give the new tenant a new disclosure statement that is no more than three months old from the date of the request
• if the landlord receives this request, the landlord must provide the new disclosure statement within 14 days

The outgoing tenant must provide to the incoming tenant a copy of the disclosure statement from their landlord when they entered into the lease. The document should be updated with details of any changes that have taken place that is no more than three months old from the date of the request.

Obtain the consent of the landlord.

Under section 60 of the Act, the landlord cannot withhold consent to a transfer unless one or more of the following circumstances applies:

(a) the proposed tenant suggests using the property in a way that is not permitted under the lease agreement;

(b) the landlord considers the proposed tenant does not have sufficient financial resources or business experience to meet the obligations under the lease;

(c) the original tenant has not complied with the reasonable assignment terms of the lease;

(d) the original tenant failed to provide the proposed tenant with business records for the past three (3) years or such shorter period as the business has been operating

The landlord should deal with the request for consent expeditiously and will be considered to have approved the assignment if:

(a) the current tenant has complied with the procedure; and

(b) the landlord has not given written notice consenting or refusing consent within 28 days after the tenant made the request.

Who pays for assignment of lease?

Under Section 51 of the Act, a landlord is allowed to claim from the tenant reasonable legal or other expenses in relation to an assignment of a lease or sub-lease. This may include reasonable expenses relating to the negotiation, preparation, or execution of the lease, obtaining the consent of a mortgagee to the lease, or the landlord’s compliance with the Act. The tenant’s liability for costs is all based on the presumption that the assignment was requested by the tenant himself.

Who prepares the assignment of lease?

Either party is able to prepare the assignment of lease agreement, but only the landlord and current tenant will know the disclosures about the property best.

Considering getting out of a lease early?

TNS Lawyers can help you follow proper procedures when exiting a lease and transferring/assigning your interests to another party. Arrange a free, no-commitment callback with us!

Other Frequently Asked Questions About Lease Assignments

There may be issues with this as it might create a new lease. Enquire further because this is not a straightforward answer!

No, as there is no requirement to register leases in Victoria.

An increase of the rent can potentially deem the assignment of lease as a new lease agreement. Therefore, yes, it has been done before but there will be rules that will apply to a new lease.

Need Assistance with Assignment of Lease?

Even in leasing arrangements, circumstances can change and your tenant might want to move on. In circumstances where another person is willing to take over an existing lease, the only way forward is an assignment of lease.

If you’re considering getting out of a lease early and/or transferring your interests to another party, getting in touch with a lawyer is highly recommended so that you can spot potential risks and identify alternatives at the outset. For assistance in all kinds of leasing matters, contact TNS Lawyers on 03 9052 3214 or fill out the contact form below.

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Buying a Business: What To Know About Lease Assignment

By Vee Naidoo

Updated on October 26, 2018 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

How are Leases Assigned?

When can a landlord refuse an assignment, key takeaways.

It’s easy to overlook assignment of the lease when buying a business. Business owners mistakenly assume that if the business is changing hands, so to will the lease agreement. This is not, however, the case.

A lease assignment is a process where one business transfers its existing lease to another. The existing tenant must obtain consent from the landlord. This is a formal process, and the landlord can refuse to provide consent in certain situations.

If you are purchasing a business, it’s important to secure the assignment of the lease to avoid uncertainty about the location from which you will operate. After all, no new business owner wants to find themselves in a position where they have to deal with unexpected relocation costs.

This article will explain the importance of securing a lease assignment when purchasing a new business, focusing on the assignment process for retail leases.

State-based legislation governs the process to assign retail leases. Generally, the existing tenant will make an application in writing to the landlord to assign the lease. The landlord will then respond to the request within a specific timeframe. In some states, like NSW, if the landlord fails to respond within a 28 day period, it is automatically taken that the landlord has approved the assignment.

On the other hand, in other jurisdictions such as Queensland, if the landlord fails to respond with a one-month timeframe, a ‘retail tenancy dispute’ will arise. This dispute is then referred to the Queensland Civil and Administrative Appeal Tribunal.

In most states, retail lease legislation protects tenants and prospective purchasers by prohibiting landlords from unreasonably withholding consent to a lease assignment.

Under most retail legislation, a landlord cannot unreasonably refuse consent. Securing an assignment of the lease when purchasing a business may then seem less crucial.

Purchasers should know the ‘reasonable’ grounds on which a landlord can refuse an assignment. We set these out in the table below.

Purchasers should secure an assignment of the lease to ensure the stability of the business’ operations. Generally, landlords cannot refuse consent to an assignment unless it is on reasonable grounds as permitted by the relevant retail legislation and lease terms. It’s important you have a commercial leasing lawyer review the lease to ensure you understand any restrictions placed on the assignment that may affect your decision to purchase the business. If you have any questions, get in touch on 1300 544 755.

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An assignment of a commercial lease is a process by which the current tenant of a leased commercial property transfers its leasehold rights to a new tenant.

The new tenant takes over the obligations and responsibilities of the lease, including paying rent and maintaining the property during the remaining lease term. The assignment process involves various legal and administrative steps, including obtaining the landlord’s consent and preparing and executing a lease assignment agreement.

Do you need help with the assignment of a commercial lease? Call our fixed-fee commercial property solicitors on 020 3417 3700 or fill in the enquiry form .

Our commercial lease solicitor in Wembley, London will help you to understand the rights & obligations of all parties involved in the lease assignment process. We can provide guidance and ensure that the process is conducted correctly.

No matter where your commercial property is, our commercial lease solicitors provide legal services regarding the assignment of commercial leases throughout England and Wales.

Table of Contents

What is an assignment of a lease?

5 things you should know about lease assignments, what is the process of assigning a lease in the uk, what is the difference between assignment and transfer of lease, do you need a solicitor to assign a lease, how much do solicitors charge for the assignment of the lease.

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Frequently Asked Questions

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An assignment of a lease is a legal process that allows the original tenant (assignor) to transfer their rights and obligations under the lease agreement to a new tenant (assignee).

When a lease is assigned, the assignee effectively takes over the remaining term of the lease and assumes all the responsibilities and liabilities outlined in the original lease agreement. The assignor is usually released from their obligations, but this depends on the terms negotiated with the landlord.

Here are a few key points to understand about lease assignments in the UK:

• Legal Documentation
• Leasehold Covenants
• Landlord's Rights

Lease assignments typically require the consent of the landlord or the freeholder, as most lease agreements have clauses that restrict or regulate assignments. The landlord may have specific criteria or conditions for approving an assignment.

2. Legal Documentation

To complete an assignment of a lease, the assignor and assignee must typically enter into a legal agreement known as a Deed of Assignment. This document outlines the terms of the transfer and ensures that all parties involved are aware of their rights and obligations.

3. Leasehold Covenants

The assignee is bound by the original lease's covenants, which are the terms and conditions that govern the lease. These may include payment of rent, maintenance responsibilities, restrictions on use, and other obligations.

4. Liability

While the assignor is usually released from future obligations, it is important to note that they may still be liable for any breaches of the lease agreement that occurred before the assignment.

5. Landlord's Rights

The landlord typically retains the right to review and approve the proposed assignee, ensuring they are financially capable and suitable to take over the lease. The landlord may also have the power to request reasonable fees or costs associated with reviewing and processing the assignment.

The process of assigning a lease in the UK typically involves the following steps:

• Review the Lease Agreement
• Obtain Landlord's Consent
• Negotiate Terms
• Deed of Assignment
• Land Registry Notification
• Completion and Handover

1. Review the Lease Agreement

The assignor (current tenant) should review the existing lease agreement to understand the terms and conditions associated with the lease assignment. It is important to check for any clauses or restrictions on assignments and seek legal advice.

2. Obtain Landlord's Consent

The assignor must seek the landlord's consent to assign the lease. This usually involves making a formal request in writing by providing details of the proposed assignee and their financial standing. The landlord may request additional information or documents as part of their assessment process.

3. Negotiate Terms

The assignor and assignee negotiate the terms of the assignment, including any financial arrangements and responsibilities. This may include agreeing on rent apportionment, security deposits, and any other relevant terms. Legal professionals can assist in ensuring that the negotiation process is fair and comprehensive.

4. Deed of Assignment

Once the terms are agreed upon, a Deed of Assignment is drafted. This document outlines the specifics of the lease assignment, including the names & details of the parties involved, the property address, the assignment effective date, and any additional terms or conditions. The Deed of Assignment must be signed by both the assignor and assignee in the presence of witnesses.

5. Land Registry Notification

After the Deed of Assignment is signed, it is typically submitted to the Land Registry. This ensures that the assignment is officially recorded and that the assignee's interest in the property is registered.

6. Completion and Handover

Upon completion of the assignment, the assignee assumes all rights and obligations under the lease. This includes paying rent, fulfilling maintenance responsibilities, and adhering to any other lease terms. The assignor is typically released from future liabilities, subject to the terms negotiated with the landlord.

Throughout the process, it is advisable for both parties to seek legal advice to ensure that their interests are protected and that all necessary legal requirements are met. Additionally, consulting with the landlord or a property professional can help navigate any specific requirements or conditions set by the landlord regarding lease assignments.

The assignment involves transferring the rights and obligations of the lease from one party (the assignor) to another party (the assignee). The assignor is typically the current tenant, while the assignee becomes the new tenant.

On the other hand, a lease transfer refers to transferring the leasehold interest from the current tenant (transferor) to a new tenant (transferee). In a lease transfer, the existing tenant is completely replaced by the new tenant.

It is crucial to consult with legal professionals, such as solicitors or commercial property specialists when dealing with lease assignments in the UK. They can provide guidance and ensure that the process is conducted correctly, protecting the interests of all parties involved.

At Wembley Solicitors, we offer affordable legal services regarding the assignment of a commercial lease on a fixed fee basis with no hidden costs or nasty financial surprises.

Our commercial property solicitors in London charge a fixed fee between £1000-£1500 (Plus VAT) for complete services regarding the assignment of a lease.

Why choose Wembley Solicitors for the assignment of a commercial lease?

• We have extensive knowledge and experience in drafting commercial leases and assignments of leases.
• Our commercial lease solicitors provide legal services on a fixed fee basis without blowing your budget and with no hidden costs.
• We provide professional legal advice and assistance at every step and keep you updated as your matter progresses.
• We provide legal services remotely throughout England and Wales. You do not need to physically attend our office.
• We have a team of qualified and accredited solicitors.
• We are authorised and regulated by the Solicitors Regulation Authority (SRA), so you know you are in safe hands.

We provide legal advice and services to both landlords and tenants. Call our property solicitor today at 020 3417 3700 for more information about the services.

Who pays lease assignment fees?

The responsibility for paying lease assignment fees can vary depending on various factors, including the terms negotiated between the parties involved and any legal or contractual provisions.

Usually, the current tenant (the assignor) and the new tenant (the assignee) bear their own legal costs.

How long does it take to assign a commercial lease?

In general, the assignment of the lease process takes around 3-4 weeks. However, it could take anywhere from a few weeks to several months, depending on how complex the lease is and how long it takes to obtain the landlord's consent.

The amount of time it takes to assign a commercial lease in the UK can vary depending on several factors, including the agreement between the parties, the complexity of the lease and the involvement of third parties, such as solicitors and landlords.

Need legal advice & assistance?

Do you need legal advice or assistance with a commercial property lease? Our expert property solicitors are ready to help you. We're authorised and regulated by the Solicitors Regulation Authority (SRA), so you know you're in safe hands.

Contact our solicitor today to get legal advice and assistance with your legal matters. You can call us on 02034173700 or leave your details here for a callback request regarding your legal matter.

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