How to Make Lease Assignments a Win-Win Opportunity

February 19, 2010

 From the Landlord's perspective, if a Tenant is rent paying, a proposed assignment is disruptive - it forces the Landlord to re-assess a tenancy that it was banking on having in place for the term of the lease, may affect the tenant mix (in a retail setting) or raise issues regarding another tenant exclusive use rights, requires coordination of operational matters with the property manager (change in signage, move-out/move-in issues, possible down-time in operation) - in other words, it generally creates work and concerns for the Landlord.

From the Tenant's perspective, a lease assignment gives that Tenant an ability to walk away from a business (at least in terms of operating it), may allow it to focus its money and efforts on other locations or endeavors, raise much-needed cash, allow the operator to get away from a problem Landlord, or even just retire.

For both parties, the assignment provision should be one of the top issues focused on before signing a lease.  While each party assumes the Tenant is there for the long haul, provision must be made for the what-if situation:  what if business is just not what was projected for that location, what-if the economy takes a downturn, what if that particular use or concept just isn't selling, what-if the operator suddenly needs to raise cash, what-if the operator just gets tired of the whole business, or what-if the Landlord would jump at the opportunity to replace that Tenant with a different or "better" use?

The key to a "good" assignment provision is one that gives both parties enough protections that their concerns and wishes can be met and allow them to proceed forward and achieve a result which, at the end of the day, puts both parties in a better place.  The linchpin of the provision is the level or standard of consent required by Landlord.  At one extreme are the (few) leases which allow assignments without any consent from the Landlord.  That can spell disaster for a Landlord by giving a Tenant a "free pass" to do what it wants without much consequence, i.e. dump and run.  At the other extreme are those leases which provide that the Landlord's consent can be granted or withheld in "its sole and absolute discretion".   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. 

In the middle, are those leases which 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.  This middle ground is where both parties may be best served.  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.  Since most Landlord's do not release the original Tenant (assignor) from liability after an assignment, having someone perhaps a bit more objective confirm that Tenant has made the right choice is an indirect benefit to the Tenant.  It also gives the Tenant some comfort that, if they have done their homework, complied with the assignment requirements, and present a reasonable assignee, the Landlord will be hard pressed to turn them down.

In a retail setting, it may be in the Landlord's best interest to work with an underperforming tenant to get a replacement in with the same or even a different use - if a Tenant wants out, it is likely that they are not generating the traffic and/or percentage rent hoped for.  It may even be an opportunity to negotiate a recapture of the space and start fresh with a tenant of Landlord's choosing.  In an office setting, if a corporation is closing its local office, as long as the replacement tenant can pay the rent, a Landlord might as well cooperate and avoid the risk that a departed Tenant will stop paying for space it is not using.

Lease assignments occur all the time in the normal course of business.  They should not, however, occur without the Landlord's knowledge or consent and should be used as an opportunity to assess the proposed assignee so that the Landlord can confirm that the assignee is appropriate and will succeed which should result in the departing Tenant not being haunted by future liability.  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.