LEASE AGREEMENT REFERENCE GUIDE 1700: RETAIL LEASE ASSIGNMENT CLAUSE SAMPLER $24.95
RETAIL LEASE ASSIGNMENT CLAUSE SAMPLER
Seven tenant oriented clauses and three landlord 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. As a result, it is often possible to tell whether an assignment provision is pro-landlord or pro-tenant merely by looking at its length. Landlord clauses are more often than not lengthy since they seek to regulate virtually all aspects of transfers of the leasehold estate by the tenant. Tenant clauses are usually short, giving the tenant great flexibility in assignment matters. As a practical matter, the best assignment clause for the tenant is no clause at all, given the law's affection for free assignability of leases.
T4, T5 and T6 come from tenant drafted lease forms. Such pro-tenant forms usually contain an abbreviated assignment clause, creating the impression that assignment issues are covered. Such forms normally receive extensive comment from landlords. Some tenant oriented forms have no assignment clause; if the landlord or the landlord's counsel is unsophisticated, this important omission may be overlooked. As a result, most landlords and their counsel use a checklist when reviewing tenant oriented forms, to the extent they agree to review them at all.
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 sale of stock of a corporate tenant, and concessions and operating agreements, since they would otherwise not necessarily require the consent of the landlord. Well drafted clauses favoring the landlord 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, e.g., paragraph D of LL3).
Tenants often try to negotiate the right to assign or sublease without the landlord's approval following a certain period of time after the commencement of the term (e.g., two years; see T1). Tenants also try to preserve the right to assign the lease in connection with the sale of the business (see T2 and T3). Finally, tenants often bargain for the right to sublease, but agree to subject assignments to the landlord's approval, not to be unreasonably withheld (see T5). The most aggressive tenant oriented clauses simply grant to the tenant the right to assign or sublease without the requirement for any landlord consent (see T6).
The following outlines general assignment and sublease issues not discussed above:
1. Distinctions between assignment and sublease:
(a) Sublease - the original tenant (sublessor) has a direct contract with the new tenant (subtenant); the subtenant generally pays the rent directly to the sublessor; frequently a sublease is only for a portion of the premises or for a portion of the term of the original lease; sublessor 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.