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.