By Todd Schafer

Lease negotiations are often long and drawn out, in part due to the myriad complex issues that a landlord and a tenant may need or want to negotiate. One issue (or, rather, set of issues) that can be quite contentious is the ability of a tenant to assign its lease, sublet all, or a portion of the premises, or otherwise transfer some or all of its interest to another party.

Obviously, the most extreme landlord position is that the party signing the lease as the tenant must always remain the tenant unless the landlord provides its consent (with the landlord being able to disapprove any change in the tenant in its sole and absolute discretion). A rationale used to “defend” this position is that the landlord has entered into an arrangement with this specific tenant and it does not want to be required to deal with another party or have any other party (that it has not approved) be an occupant in the landlord’s building (or development). Whether or not specifically stated by a landlord, the landlord’s position may also be predicated on other things such as: landlord wanting to capture any additional value from the premises (only landlord should “make a profit” from leasing) or landlord not wanting to have competition in leasing space in the building/development.

From a tenant’s perspective, flexibility is key. Whether in connection with a future business opportunity (especially in the event the tenant has multiple locations), because business is not proceeding as well as initially planned, or due to some other reason that the tenant no longer desires to continue to be the occupant of the entire premises, a tenant that has the ability to transfer its lease or its rights in some or all of the premises without having to obtain its landlord’s approval is obviously in a better position than a tenant that needs to obtain its landlord’s consent.

In most cases there is some level of compromise between the parties as to the landlord’s rights to say no and the tenant’s rights to do things that are not subject to landlord’s approval. Among these potential compromises:

  • Carving out certain transactions from the landlord’s approval rights. For example, in connection with a merger or other consolidation, as part of a sale of the tenant’s entire business or all of tenant’s assets, or transfers to certain pre-approved parties (or parties having certain minimum financial characteristics and/or a certain level of experience in operating such a business), which if the tenant is a franchisee might include the tenant’s franchisor or another franchisor-approved franchisee.
  • The standard of the landlord’s approval. Generally, this could mean that landlord’s decision has to be commercially reasonable. More specifically, the parties could identify certain criteria that would allow landlord to disapprove a transfer. For example, if the new occupant intended a different use of the space or required other changes in the terms and provisions of lease, if the transferee has previously negotiated with landlord recently or been an occupant of the building/development, if the transferee isn’t creditworthy, or if the transferee has a reputation that negatively impacts the landlord or its property (these latter items often require further negotiation as to who makes the determination and to what standard).

Other items that are often discussed and negotiated in connection with the assignment, subletting, and transfer provisions:

  • What information needs to be given to the landlord in connection with this right to approve?
  • Whether the tenant is to reimburse the landlord for its cost to review and sign documentation (and, if so, whether there is a “cap” on the total amount).
  • Will the landlord be paid some or all of the “excess consideration” that the tenant is paid in connection with the transfer (at least as to monetary consideration received by tenant pertaining to the lease/real estate).
  • What rights does the landlord have if it does not approve a transfer (e.g., does the landlord have the right to terminate the lease or portion thereof that would’ve been the subject of the disallowed transfer)?
  • Whether the tenant and/or existing guarantors will be released from liability (and, if so, whether the release will apply to future liability).

As you can see, there is often a lot to discuss in connection with these types of transactions.  No matter which form of lease is used, the parties should pay close attention to these often somewhat overlooked lease provisions for issues that could be of great importance down the road.