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Lease Strategies

Product Overview

This LARG contains the following items:

The Small Tenant Versus the Pro-Landlord Assignment Clause—Picking the Right Fight, and the Lease Clause Critique: 9 Pro-Tenant Fixes for the Pro-Landlord Assignment Clause.

Number of Single Spaced Pages: 12





The small to medium size commercial tenant will usually be stuck with the landlord's form lease, and that form lease will no doubt contain a monster of an assignment clause. This LARG looks at the how the tenant with limited leverage can negotiate specific concessions in the landlord's comprehensive assignment clause. The first section reviews the type of provisions that the tenant might consider before mounting its attack. The Lease Clause Critique features nine different pro-tenant clauses that the tenant can use for the battle.

The Small Tenant Versus the Pro-Landlord Assignment Clause--Picking the Right Fight

It was in the distant past that commercial landlords began to prohibit assignments and subleases in their lease forms--unless the tenant first obtained their consent. They did so because absent such restrictions, the law normally gave the tenant a free hand to assign or sublease without the lessor's approval.

But that was only the start. Over the years, landlords have added layer after layer of boilerplate to their assignment clauses. It is not unusual for tenants these days to peruse landlord lease forms with three or four page assignment clauses in microscopic print. And typically, the tenant must obtain the landlord's consent to transfer "any interest in the lease or in the premises."

What's the small to medium size tenant to do? The tenant with limited leverage certainly can't reject the entire clause--it doesn't have the bargaining power for that. After the tenant reviews the precise provisions in the landlord's form, it must decide what it wants to fight about--and propose its own language to solve the problem. It is obliged to pick its assignment issues carefully and precisely, and argue persuasively for limited changes to the landlord's clause.

Of course, some problems can only be solved by deleting language in the landlord clause. Even so, the tenant will probably do better in its negotiations overall if it has an assortment of its own clauses ready to put on the table. Pre-drafted modifications show exactly what sort of changes the tenant seeks in the landlord form. The tenant can dispense with long winded conceptual discussions if it comes prepared with its own sample clauses. This approach allows the tenant to cut to the chase, and say, "We want the right to assign to affiliates as contained in our standard rider, and here is a copy."

Zeroing In on the Specifics

Commercial tenants that do lots of deals every year normally use this method. The changes they try to negotiate usually relate to six distinct areas of the landlord's assignment clause. They are:

Approval Exceptions. Such exceptions specify assignments or subleases which may be made by the tenant without the need to obtain the landlord's approval. They often include:

  • the right to assign or sublease to corporate subsidiaries, affiliates or parents;
  • the right to assign to a surviving corporate successor created through merger or consolidation;
  • the right to assign to the purchaser of all or substantially all of the tenant's assets;
  • the right to make stock transfers which do not result in a change of control for the tenant;
  • the right to assign to an entity with a substantial or specified net worth;
  • the right to transfer to a franchisee; and
  • the right to execute financing documents for leasehold improvements.

Limited Sublease Rights. These give the tenant the right to sublease a certain portion--usually less than half--of the premises. The portion which may be subleased without the landlord's consent may be expressed as a certain percentage of the premises or a certain amount of square footage.

Post Transfer Releases. These release the original tenant from liability under the lease after an assignment. Sometimes these provisions:

  • are conditioned upon the transferee's having a certain net worth; or
  • are effective only after a "honeymoon" period during which there are no defaults by the new tenant (i.e., the transferee).

Excess Rental Provisions. Such provisions permit the tenant to share in any excess rentals (i.e., rentals in excess of the per square foot rent payable under the lease by the original tenant) paid by the transferee after a transfer. Out of pocket expenses incurred by the tenant in connection with the transfer, such as brokerage commissions, attorney's fees, old and new tenant improvement costs, etc., may be figured into the computation of such excess rentals. As a rule, tenants only pursue such provisions when vacancy rates are low, and there is a good chance rents will increase during the term of the lease.


End of Excerpt