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Allowing a tenant to have a broadly defined use clause would not be beneficial for a landlord because of a landlord’s interest to have absolute control over their property, including the profits derived therefrom, and its tenant mix.
Many landlords prefer to prohibit the subleasing of space or assigning of a lease to “a federal, state or local governmental division, department or agency, including, without limitation, court, social security offices, labor department office, drug enforcement agency, motor vehicle agency, postal service and military recruitment offices,” as these types of tenants, among other things, increase traffic in the building which consequently result in greater operating expenses of a building from both a maintenance and security standpoint.
A landlord should not only narrowly define the tenant’s permitted use of the space, but also include in its initial lease draft a myriad of prohibited uses and if possible, a list of any “exclusivity provisions” that the landlord has agreed to with other tenants.
Virtually all landlords are not concerned with having a prohibition of leases to unions or labor organizations.
Most well-drafted initial versions of a lease will include language stating in some manner that an assignment requiring landlord’s consent shall be deemed to include among other things: (i) any change in control of the entity; (ii) a withdrawal or change, whether voluntary, involuntary or by operation of law of any one or more of the partners, shareholders, members or other owners if such withdrawal represents fifty percent (50%) or more of the ownership interests of the partnership, corporation or limited liability company as then constituted, or the dissolution of the entity; and (iii) the sale of fifty percent (50%) or more of the value of the assets of tenant.
Tenants should want the right, without landlord’s consent, to assign or sublease to a related entity (i.e., a wholly-owned subsidiary of tenant or any corporation or entity which controls or is controlled by tenant or is under common control with tenant), regardless of the net worth of the related entity.
Tenants and their leasing professionals should strongly consider adding the following leasing carve-out to the definition of assignment that would require landlord’s consent: “The direct or indirect sale of a non-controlling interest in tenant, regardless of the percentage of ownership transferred.”
Landlords should attempt to include language in their initial lease draft that upon an assignment or sublet, tenant agrees that it (or its assignee) shall deposit with the landlord as additional security, up to three (3) additional months of security based upon the then monthly installment of fixed rent payable by tenant.
In the event of an assignment or sublease, a tenant should gladly accept landlord’s right in the lease to request three (3) months (or more) of security deposit to ensure landlord has funds available to cover any potential defaults under the lease.
Tenants should accept “waiver” language in the lease that provides that in no event shall tenant be entitled to make, nor shall tenant make any claim and waives any such claim, for monetary damages based upon any claim or assertion that the owner has unreasonably withheld or unreasonably delayed its consent or approval to a proposed assignment or subletting, with tenant’s sole remedy being an action for specific performance or injunction, even where landlord has acted in bad faith.
From a landlord’s perspective, once there is an assignment or sublet, the primary tenant should no longer be liable.
Landlords should include in the lease that upon an assignment of the lease, they have the right to collect rent directly from the assignee.
Generally, upon an assignment of a lease, the named tenant and any guarantor of the lease are released from any liability under the lease.
Tenants should attempt to negotiate a basic desk sharing and permitted occupants clause, which provides that the tenant shall have the right, without landlord’s consent, to license or sublease up to 1/3 of its space in the aggregate to another user or users.
Tenants and their leasing professionals should make sure that any rights of landlord as to recapture or profit sharing do not apply to any permitted occupant or desk sharing arrangement.
Although not necessarily common in retail leases, it would be in the best interest of a retail tenant to request a permitted occupant provision to (i) drive additional traffic to the space, (ii) make better use of the allotted space and (iii) help it effectively reduce its rent (given that the permitted occupant will be paying the tenant for its permitted occupancy).
The benefits of subleasing space for a potential subtenant include: (i) below market rents; (ii) pre-built office space without the necessity of large capital expenditures; and (iii) the potential inclusion of modern phone, furniture and modular work station systems, not to mention filing cabinets and chairs at little or no cost to the subtenant.
When subletting a space, a tenant generally remains primarily liable for its financial and non-financial liabilities to the landlord, despite the sublease.
Despite its lack of direct privity with the landlord, a subtenant need not be concerned about a failure of the sublandlord to perform its obligations under the lease.
Tenant advocates should include language in the assignment and subletting provision stating that “Landlord should not be allowed to unreasonably withhold, condition or delay its consent.”
In an assignment and subletting clause, many leases provide that the space can be advertised or subleased for an amount less than the lower of the rental called for in the lease or the then fair market value.
In addition to trying to secure a landlord non-disturbance and attornment agreement (“NDA”) during the sublet consent process, potential subtenants should negotiate with the sublandlord that they can provide the security deposit in the form of a letter of credit to protect themselves in the event the sublandlord defaults under the master lease and/or goes bankrupt.
It is assumed that all permitted subtenants (or assignees) are allowed to exercise the tenant’s renewal rights under the lease, even without language in the lease stating same.
In a market where current rents are high, but the rent under the lease provides for a significantly below market rent, landlords may strongly consider electing to recapture the premises in the event of a proposed transfer by tenant.
Tenants and potential subtenants should know that “time kills deals,” and unless negotiated otherwise before a tenant signs its lease, landlords generally have at least thirty (30) days, if not more, from the receipt of a completed sublease package to make a decision as to whether to consent to the sublease (or recapture the space).
To have a use clause for a nail salon that merely states that “Tenant shall use the premises for a nail salon and no other purpose” is an example of a narrowly defined and pro-landlord provision.