Archive for July, 2009

Assignment and Subleasing

Sunday, July 26th, 2009

Understanding vs. Misunderstanding

It has been several weeks since I made a post to this blog, due to the fact that I was vacationing in Europe (mainly Italy). In my travels, it was interesting that because of my heritage (all four of my grandparents were born in Italy), Italians looked at me and assumed that I speak Italian (which I do not, yet). They would come up to me and start into a question or statement, and I would stare at them with a blank look on my face. My wife , Elaine, obviously not of the same heritage would always get a “Hello”, “Good Morning” or some other attempt in English. I received the same polite greeting, but usually in Italian.

What we found is that even if an attempt was being made to communicate in the same language (such as my use of English and an Italian’s attempt to use English) there would often be a discontent as to the meaning and intent of terms, and this usually meant that the result was something not intended (such as receiving a completely different type of food on your plate than ordered).

The topic for this week’s blog post (and continuing along with my five part series on leases begun in June) is Assignment and Sublease. This is an area where the writing set forth in the lease document by both of the parties is often misunderstood or misinterpreted by one, or both, of the two parties to the agreement. The reason for this disconnect, I believe, is due to the fact that landlords and tenants come from different perspectives, and often assign different meanings to their inter-communication based on different expectations. In most cases, the parties come to the table believing the other to be well intentioned, and often times agree to basic principles without the aid of legal counsel. In the area of assignment and sublease provisions, this fact may result in an assignment provision that is only effective to give Tenant rights based upon absolute consent on the part of the Landlord (and if this is the case one can argue that the provision could have been limited to a single short sentence), or a Landlord who has basically lost control over the possession and nature of its property for the full term of the lease (this where the provision basically allows unfettered assignment or subletting).

It is in the Landlord’s best interest to create a lease which either does not allow assignment and subleasing at all, limits it, or penalizes its use. It is in the best interest of the Tenant to hedge its bet by having a right to transfer its lease obligation to a third party, with almost no right of the Landlord to reject or condition either an assignee, or a changed use.

Unfortunately, a detailed legal treatise on every issue involved in lease assignment and subletting is beyond the scope of this blog post. However, I thought I would give a short list of considerations to think about, both from the perspective of Tenant, and then from the perspective of Landlord, to conclude this post:

Tenant perspective:

1. Does the provision give the Landlord an absolute right to consent? Does it, at least, require the Landlord to be reasonable in its determination? Will the Landlord agree to some specific definition as to how consent will be determined (i.e. some objective standards)?

2. How does the lease define assignment and subletting? If I sell my business will the lease be deemed assigned by virtue of the fact that the stock or member interest of the company has changed hands? Does the lease freely allow assignment in the event that I sell all of the assets of my Company? What about in the event of merger by the Tenant entity into some other entity?

3. What are the costs going to be if I request an assignment or sublease? What time frame is allowed for the consent to be given by the Landlord, and are there any hidden definitions or requirements that might cause enough uncertainty such that the Landlord can get away with not granting its consent?

4. Does the provision allow for sublease of less than all of the leased space?

5. Does the provision provide the Tenant with a release from the burdens of the lease in the event of full assignment to a third party? If not, are there any set terms or conditions the satisfaction of which can earn the right to release?

Landlord Perspective:

1. Does the provision assure that the Landlord has ample basis upon which it can withhold consent: any change in use, or financial stability of the proposed assignees, etc.? Are there specific or peculiar reasons Landlord might want to withhold consent (even if the general provision allows consent)? If so these should be listed (i.e. If Landlord has specific objectionable uses for the property, but otherwise assignment is generally acceptable – this is particularly important for a Landlord with other neighboring leases where there may be exclusivity provisions?)

2. Who benefits from a difference in the rent to be paid by the assignees or subtenant? The Landlord should consider that any profit over and above the rent normally paid by Tenant should be paid to the Landlord?

3. Does the provision assure that Landlord does not bear any of the costs associates with the request for assignment, legal review and costs of documentation?

4. Does the assignment provision broadly define assignment and sublease such that the Tenant cannot do what is prohibited by other legal means (such as effecting assignment though a transfer of the Company instead of by actual assignment)?

5. Notwithstanding the ability of the Landlord to only withhold consent based upon being reasonable, does the lease make sure that the liability of the Landlord is limited if Landlord breaches the provision (by withholding consent)? It is in Landlord’s best interest in the lease to generally limit its liability to equitable remedies in any event, and in the case of this provision, consider being very specific as to remedy limitations.