Final Assessment: Assignment and Subletting (Parts 1-5)

The assignment and subletting clause is one of the most important clauses to draft, review and negotiate in a commercial lease, primarily because of a (i) landlord’s desire to control everything and anything related to its building, including but not limited to its tenant mix and the strength of its tenant base to maximize profits and (ii) tenant’s desire to have as much business and financial flexibility through the term of the lease.

Tenant advocates need to carefully review the assignment and subletting clause within the lease and be aware that at best, most well-crafted assignment and subletting clauses will frame the landlord as somewhat of a democratic dictator, wherein the landlord essentially has the power and complete control over how, if, and when an assignment or sublease will be effectuated and, if one occurs, the terms under which the landlord will benefit as a consequence thereof.

From a landlord’s perspective, a well-crafted subletting and assignment clause may include the landlord’s right to increase fixed rent upon an assignment of the lease.

A tenant should seek carve-outs from (or delete wherever possible a) landlord’s recapture and leaseback rights in a subletting and assignment clause.

A landlord should not be concerned about the rights and obligations of a subtenant contained in a sublease, including making sure that the sublease is subordinate to the terms and conditions contained in the lease between the landlord and the tenant.

An assignment and subletting clause drafted by the landlord should include, among many things, what a landlord may condition its consent on, what a landlord’s rights are with respect to an assignment, and who pays the cost for the landlord’s review of the request to assign or sublet.

In the assignment and subletting clause, tenants and landlords should address tenant’s recapture and leaseback rights.

In a well-drafted subletting and assignment clause, the landlord should include language (and the tenant thereafter negotiate) as to the sharing of profits and key money.

Landlords should attempt to condition a tenant’s right to assign its lease or sublet all (or a portion) of its space, on landlord’s prior written consent.

When negotiating the right to assign its lease or sublet all (or a portion) of its space, the tenant should attempt to include a time limit as to when landlord’s consent must be given.

Landlords should readily agree to a tenant’s request to have “deemed consent” language where if the landlord does not respond to tenant’s written subletting or assignment request within ten (10) to fifteen (15) business days of its request, consent shall be deemed granted.

Wherever possible, a landlord should severely limit or delete language granting the tenant the right to sublet its space or assign its lease without landlord’s consent.

Landlords should require that a tenant’s written request to landlord for its consent to an assignment or sublet shall include the name of the proposed assignee or subtenants and their principals, and any other information as the tenant deems it wants to provide.

As “time kills deals,” although they might not be successful in doing so, tenants should attempt to negotiate that the required response time for the landlord’s consent to an assignment or sublet starts to run upon receipt of (i) the necessary financial information required of the subtenant or assignee, (ii) an executed term sheet or letter of intent signed by both parties and (iii) the proposed assignment form or sublease and not the executed version thereof.

A well-drafted assignment and subletting clause will often include language detailing what information a landlord will want from its tenant in the event they want to assign or sublet, such as the name(s) and current financial information of the proposed assignee or subtenant (and in many cases, those of their controlling principals).

A landlord would very likely want to recapture a tenant’s space when the market rent for the tenant’s space is significantly lower than the rent which the tenant is currently paying under the lease.

Typically, when a landlord recaptures the tenant’s space, from and after the effective date of termination of the lease, the tenant will no longer have any liability for the lease.

Generally, when a tenant sublets its space or assigns its lease, the tenant is no longer on the hook financially either primarily or secondarily for the lease.

The following language is pro-tenant language that a tenant advocate should negotiate for as early as the letter of intent stage: “In no event shall landlord have a recapture right for the space if the transfer of the lease is pursuant to a sale of a tenant’s business or assets, or to an entity that is related to or is acquiring the tenant by way of merger.”

It is especially important when representing retail tenants who have made significant financial expenditures on their space to either delete the recapture or leaseback provision or secure a carve-out that prevents landlord from exercising its recapture or leaseback rights in the event of a transfer of the lease pursuant to a sale of a tenants business or assets or to an entity that is related to or is merging with tenant.

An initial draft of a lease by a landlord should contain language stating that if a tenant is attempting to partially sublet its space, the landlord would have the right to recapture or leaseback either the entire space or the portion of the space tenant is attempting to sublet.