Lease Assignments: A Window of Opportunity for Landlords

Some leases provide that the landlord's consent "shall not be unreasonably withheld" which means that the landlord must be reasonable in its review and decision making.  Others provide that the landlord's consent can be granted or withheld in "its sole and absolute discretion".  Both create a moment for re-evaluation by the landlord and both give the landlord review rights - with the latter standard providing greater rights than the former.

If landlord's consent is "not to be unreasonably withheld", the landlord still has the ability to review and evaluate the situation but it must do so on more objective criteria such as: the financial creditworthiness of the proposed replacement tenant (the assignee), whether the assignee's use is consistent with the tenant's permitted use under the lease, and the business experience of the proposed assignee.  The landlord wants and needs to confirm that the proposed assignee has the wherewithal to perform under the lease and prosper.

If the landlord can grant or withhold its consent "in its sole and absolute discretion", the window opens even wider.  Maryland courts have held that if the lease contains this "magic" language, the landlord can deny consent for any reason or no reason at all - it can be as arbitrary as it likes.  However, notwithstanding this ability, it may be in the landlord's best interest to work with an underperforming tenant to get a replacement in or to even recapture the space and start fresh with a tenant of landlord's choosing or a different use.

Regardless of which standard of approval a lease contains, I always counsel landlords to use the proposed assignment as an opportunity to stop and assess the tenancy.  A landlord can use the following as a checklist of questions it should ask:

1.  Who exactly is the proposed assignee?  Is it properly formed and authorized to do business in the state? 

2.  Do they have the financial ability to take on the lease obligations?

3.  Do they have the business background and experience to be successful?

4.  Is the use changing?  If so, is it appropriate for that property and does it violate any other tenant's exclusive use rights?  Will the new use generate increased parking needs?

5.  Is the current tenant in default monetarily or otherwise?

6.  Is there a guarantor on the existing lease that would stay on the hook?

7.  Does an inspection of the premises by landlord reveal any repair, maintenance or operational issues that need to be addressed before the assignment should proceed?

8.  Is the trade name changing?  If so, are there signage issues that need to be addressed?

9.  Is there a security deposit on hand?  If so, it needs to be transferred on the landlord's books into the assignee's name (not returned to the departing tenant).  If there is no security deposit, given that the landlord has no experience with the proposed assignee, it should demand one.

In addition to the above, if the "sole and absolute discretion" standard is applicable, the landlord should also ask itself:

10.  Given the market and landlord's plans for the property, is the landlord better off negotiating a termination of the existing lease, recapturing the space and using the space for someone or something else?

11.  Are there provisions of the lease that are problematic for the landlord and should be amended or clarified at this time - either because they were poorly drafted and, as a result, open for interpretation and debate (such as who has the obligation to repair what or what exactly is included in operating expenses), or even missing from the lease (such as who has the obligation to address changes required as a result of The Americans with Disabilities Act or how the parties deal with hazardous materials brought onto the property)?

In the event a landlord decides to grant its consent to an assignment -under either standard of approval, the assignment should be contingent on the following:

1.  The assignee must assume all of the obligations of the tenant after the assignment date.

2.  The current tenant must pay all charges due through the assignment date.

3.  The existing tenant and any existing guarantor(s) remain liable throughout the remainder of the term (for that is who you struck the original deal with).

4.  The assignee must promptly obtain all necessary licenses and permits to operate so that there is no "downtime" between tenants.

Finally, be sure the assignee delivers a certificate of insurance and discloses any hazardous materials it may be using in its operations.  Confirm that the assignee has inspected the premises and understands that it is taking it "as is" (as far as the landlord is concerned) and does not expect the landlord to install any improvements or alterations for assignee.

Sometimes, on paper, everything about an assignee looks good and you do not find out until after the assignment, that something is not right.  A case in point was the assignment of a spa facility lease which the landlord had approved based upon (what appeared to be) a strong personal guaranty and (alleged) experience.  It was not until after the assignee's alterations were completed and the spa became operational that a surprise visit by a property manager found the "technicians" in Teddies!  It soon became the subject of an undercover police sting operation in which they determined that the spa's massage services were more than adequate to meet its clients' needs and shut it down!  Luckily incidents such as this are rare.

Lease assignments occur all the time in the normal course of business.  They should not, however, be allowed to occur without the landlord's knowledge or consent and should be used as an opportunity to re-evaluate the existing lease and assess the proposed assignee so that the landlord can either be comfortable that the assignee is appropriate and will succeed, or use this opportunity to regain control of its real estate.  In the end, having a tenant that wants to be in the landlord's property and is successful will provide a win-win result for both the landlord and the tenant.