LEASE AGREEMENT REFERENCE GUIDE 1690: OFFICE AND INDUSTRIAL LEASE ASSIGNMENT CLAUSE SAMPLER $24.95
OFFICE AND INDUSTRIAL LEASE ASSIGNMENT CLAUSE SAMPLER
Three landlord oriented clauses and four tenant oriented assignment clauses follow. Tenant Clause #1 is referred to as T1 and Landlord Clause #1 is referred to as LL1, and so on.
The law favors free assignability of leases. Thus, absent specific requirements and prohibitions concerning lease transfers, the tenant is free to assign or sublease. Generally, office tenants make modifications to landlord oriented forms, either by interlineation or by attaching a rider with tenant changes. Normally, office tenants do not use their own lease forms; use of tenant oriented forms is much more common in retail leasing transactions.
Specificity is the key for pro-landlord clauses. Specific prohibitions must appear regarding assignment and subleasing, since prohibition of one generally does not prohibit the other. Note, for example, that T4 requires the landlord's consent for assignment but does not cover subleasing (which permits the tenant to sublease without the landlord's consent). Generally, landlord oriented clauses define assignment to include the transfer of any interest in the lease by the tenant, including the sale of stock of a corporate tenant, and transfers by operation of law, since such transfers may otherwise not necessarily require the consent of the landlord. Clauses favoring the landlord may also set out requirements for documentation (and payment of landlord counsel fees) that must be submitted to the landlord for a requested consent to a proposed assignment or sublease (see LL1, Section 25.4 and LL2, Section 14(e)).
Pro-landlord clauses often contain rights of the landlord to terminate the lease in the event a transfer is proposed by the tenant (see LL1, Section 25.2), and recapture rights in favor of the landlord (see LL1, Section 25.3 and LL2, Section 14(b)). Pro-landlord clauses frequently provide that the landlord is to receive all or a portion of any rentals ("excess rentals") from a subtenant or assignee which exceed the rental payable under the lease (see LL2, Section 14(b)(5) and LL3, Section 15(b) (vi)).
Tenant oriented provisions frequently are added to permit intracorporate assignments (see LL1, Section 25.3 (B), T2 and T3), and to permit the tenant to share excess rentals in the event of a transfer (see T4, Section 15 (b)).
The following outlines general assignment and sublease issues not discussed above:
1. Distinctions between assignment and sublease:
a) Sublease - the original tenant (sublandlord) has a direct contract with the new tenant (subtenant); the subtenant generally pays the rent directly to the sublandlord; frequently a sublease is only for a portion of the premises or for a portion of the term of the original lease; sublandlord continues to be liable for payment of the rent and for the performance of all other obligations under the lease notwithstanding the sublease.
b) Assignment - a new direct contract is established between the landlord and the new tenant (assignee); the assignee generally pays the rent directly to the landlord; frequently an assignment is for the entire premises for the entire balance of the term; the original tenant's (assignor's) liability continues unless landlord expressly releases the assignor from liability.
2. Leases usually contain prohibitions against assignment and sublease unless the landlord's consent is obtained and usually such consent "shall not be unreasonably withheld"; even so, often it is difficult to predict what will constitute an unreasonable withholding of consent to a transfer under applicable state law. As a result, most landlord oriented clauses include the following:
a) Detailed definition of what constitutes a reasonable withholding of consent by the landlord to a transfer, e.g., a conflict with other uses in the complex, or financial inadequacy of the proposed transferee.
b) "Recapture" clauses permitting the landlord to "recapture" (i.e., sublease or take an assignment back from the original tenant for) that portion of the premises proposed to be transferred to a new tenant, often at the current per square foot rental under the lease; this permits the landlord to get the space back and make a new lease for the space with a third party; the landlord is in control of who goes into the space, and the original tenant is still liable under the original lease absent an express release; recapture clauses are often used in conjunction with language providing that landlord's consent to a transfer will not be unreasonably withheld, but that if such consent is given by the landlord and the landlord does not exercise its recapture rights, that the landlord will share in the excess rentals (i.e., rental in excess of the per square foot rent payable under the lease by the original tenant) paid by the new tenant; a typical landlord share would be 50% of the excess rental; the tenant retains the other 50% which serves as an incentive to find the new tenant; are brokerage commissions, attorney's fees, old and new tenant improvement costs, etc., figured into the computation of what constitutes excess rental?
c) Broad definition of what constitutes an "assignment" requiring the consent of the landlord, e.g., transfers by operation of law, sales of stock by a corporate tenant, transfers of a partnership interest by a tenant that is a partnership, mergers, or transfers of "any interest in or to the premises".
d) Limitations upon the tenant's remedies in the event the landlord unreasonably withholds its consent to a transfer, i.e., no damages, only arbitration, injunction, or declaratory relief.