Discover How a Commercial Lease Assignment Works

Discover How a Commercial Lease Assignment Works

While commercial landlords are often reluctant to consent to a lease assignment, COVID-19 has changed everything…

While commercial landlords are often reluctant to consent to a lease assignment, COVID-19 has changed everything. With so many businesses struggling to stay afloat, landlords are more willing to consider the assignment of a lease to add to the prospect that rent payments continue and buildings remain occupied.

Lease Assignment 101

In basic terms, a lease assignment occurs when the current tenant to an existing lease agreement (known as the “assignor”) assigns the lease rights and obligations to a third party (known as the “assignee”). A lease assignment should not be confused with a sublease, in which the existing tenant transfers by a sublease document some or all of their interest, and leased space, to a third party, known as the “subtenant” (or “sublessee”). (You can find a discussion of subleases here.)

The primary difference between a sublease and an assignment is that in a sublease the subtenant does not assume all the obligations of the tenant under the lease agreement. The original tenant, often referred to as the sublandlord, is still the responsible party under the terms of the lease and may often take on many of the responsibilities of a landlord in relationship to the subtenant. Subleases often only affect a portion of the leased premises and the sublease rent and other sublease obligations may differ greatly from the obligations in the prime lease.  Under an assignment, the original tenant transfers its entire interest in the premises, and the assignee has a direct contractual relationship with the landlord. While the original tenant ceases to have any rights under the lease, it will in most cases remain liable to the landlord if the assignee defaults in any manner under the lease.

For tenants, lease assignments can be a valuable exit strategy if they want to vacate the leased premises prior to the expiration of the lease. For landlords, lacking a lease with a continuous operations clause, an assignment keeps the building occupied and increases the likelihood that the premises will continue to generate revenue by the addition of a permitted responsible party.

Commercial Lease Assignment Process

Whether or not you can assign the lease will be dictated by the terms of the original lease. Most commercial lease agreements contain a clause detailing the circumstances under which the lease may be assigned to a third party. Such clauses vary in complexity depending on the size and location of the premises, the status and economic power of landlord and tenant as well as the status of the leasing market in the geographic location of the premises. Because the permission of the landlord is typically required, the lease clause will outline the process for requesting consent for an assignment and/or the conditions under which permission may be granted.

The lease, in some cases, will provide that the landlord must be “reasonable” in granting its consent; however, others may state that the landlord has “sole discretion” to do so. Landlords will typically require the assigning tenant to provide financial statements of the assignee confirming that the assignee has the financial ability to be able to satisfy the economic and other provisions of the lease. Required information may include: a description of its business; confirmation that the assignee’s use of the sublease premises is permitted under the terms of the lease.  The assignment clause will often require disclosure of any consideration paid by the assignee to the assignor in connection with the assignment of the lease which exceeds the rent paid by assignor to landlord pursuant to the lease and a process for the landlord to “share” in any profit.

Assignment provisions may also include additional requirements. For instance, the original tenant may be required to reimburse the landlord for the costs of the transaction, i.e., legal and administrative fees. Some leases may also allow the landlord to terminate the lease and recapture the space rather than consent to the assignment.

Commercial Lease Assignment Agreement

A lease assignment agreement is generally far less complex than the original commercial lease agreement. However, it will often contain several important provisions that all parties should closely review.

It is necessary that the assignment/assumption agreement accurately states the date and the name of the parties and an accurate description of the lease to be assigned. The lease assignment agreement will also expressly state that it incorporates the original lease as if it was restated in full. A fully executed copy should also be attached.

The assignment will also generally state that the assignor is assigning and transferring all of the assignor’s right, title, and interest in the lease and the premises, subject to all the terms and conditions of the lease. The effective date is when the lease assignment will occur, and will generally continue until the date of termination in the original lease. The assignment agreement must also address the issue of lease renewal options.  The assignee may want the right to extend as provided in the prime lease however, that will extend the obligations of assignor to landlord.  The assignor is generally liable for all rent owed and lease obligations to be performed prior to the effective date, while the assignee is responsible for payments due and all obligations after that date.

The assignment agreement may also contain covenants by each of the landlord, assignor and/or assignee. For instance, the assignor may be required to attest that it is the lawful and sole owner of the interest being assigned,  what happens if the assignee breaches the lease after assignment, governing law, prohibitions against further assignments without consent of the landlord, and required dispute resolution procedures (arbitration and mediation). The assignment document should address to whom any security deposit shall be returned.  The landlord may execute the assignment document for the sole purpose of providing approval of the assignment but not assuming any obligations other than provided in the prime lease.

Key Takeaway

While an assignment may seem like a simple business contract, it is full of traps for the unwary. Therefore, it is often wise to consult an experienced commercial real estate attorney. Given the prospect of continued economic uncertainty, landlords and tenants currently negotiating leases should also work with counsel to secure assignment provisions that will most benefit them if an assignment is necessary during the lease term.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Victor Kinon, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.