In a commercial lease, the assignment provision often receives less attention than headline terms like rent or operating expenses, but it remains one of the most important provisions. Assignment and subletting govern whether, and under what circumstances, a tenant can transfer its leasehold interest to another party. For landlords, the provision is a tool to maintain control over their asset, tenancy mix, and financial health of the property. For tenants, it represents flexibility and an exit strategy. Understanding how these provisions work is essential for both landlords and tenants when negotiating commercial leases.
Landlord Consent Standards in Lease Assignments
At its most basic, an assignment provision in a commercial lease prohibits the tenant from assigning the lease without the landlord's prior written consent. The sophistication comes in how that consent standard is defined.
- Landlord-friendly version: Consent may be given in the landlord's sole discretion to approve or deny any assignment.
- Tenant friendly version: Consent cannot be unreasonably withheld, conditioned, or delayed.
This naturally leads to the question of under what circumstances a landlord may withhold consent. Leases often include objective standards identifying when a landlord can deny consent. For example, when the proposed assignee has inadequate financial strength, too little experience, or intends to use the premises in a manner inconsistent with the property or permitted use under the existing lease.
Permitted Transfers in Commercial Leases
Many leases include "Permitted Transfers." These are situations where the tenant is allowed to assign the lease without landlord consent. Common examples include transfers to affiliates, parent companies, or subsidiaries, as well as assignments made in connection with mergers, acquisitions, or corporate reorganizations.
Landlords often place conditions on these transfers, such as requiring that the new tenant assume all of the obligations under the lease, meet certain net worth thresholds or that notice be given within a specified time, and require the existing tenant to remain liable (to the extent that entity still exists). If these conditions are not met, the transfer remains subject to the landlord's consent.
Landlord Safeguards in Assignment Provisions
Landlords also protect themselves through additional provisions designed to safeguard their interests.
Recapture Rights
A recapture right allows the landlord, upon receiving a tenant's request for consent to assign, to take back the premises rather than approve the transfer. While this gives landlords flexibility to control their property, tenants often view it as a risk, particularly if the ability to sublease or assign is a key part of their business plan. Well negotiated leases sometimes limit the landlord's recapture right to assignments of the entire premises or to transactions that would otherwise provide value to the tenant. Many leases also contain a provision providing that the tenant may void the recapture by rescinding the request for consent.
Profit Sharing
Landlords often look to capture profit when a tenant benefits financially from an assignment. If an assignee is willing to pay more than the rent specified in the lease, many landlords require a share of that excess. A landlord friendly lease might require the entire profit to be paid over, while tenants typically negotiate to retain at least a portion after accounting for transaction costs, unamortized build out expenses, and brokerage commissions. Tenants will also look to exclude from the definition of profits goodwill and value for the business being transferred.
Continuing Liability and Documentation
Even when an assignment is permitted, most landlords insist that the original tenant remain liable for lease obligations. This ensures that the landlord has recourse if the new tenant defaults. Tenants, of course, prefer to be released from liability, and in some arrangements a release may be granted if the assignee meets certain financial criteria and formally assumes the lease obligations, typically after a set period of time with no defaults from the assignee. Assignment provisions also usually specify the documentation required, such as a written assumption agreement, delivery of financial statements, and payment of the landlord's reasonable attorneys' fees.
Assignment vs. Sublease in Commercial Leasing
The distinction between an assignment and a sublease is another area of the lease that needs to be well crafted. While both involve transferring rights to another party, they operate differently. An assignment typically transfers the entire leasehold interest , whereas a sublease creates a landlord/tenant relationship between the original tenant and the subtenant. Well drafted provisions make clear whether rules regarding consent, profit sharing, and recapture apply equally to subleases or differ in certain respects.
Change of Control and Unauthorized Transfers
For entity tenants, a change of control can also be deemed an assignment. This prevents tenants from transferring their lease obligations indirectly through a stock sale or ownership restructuring. Tenants often seek carve outs, especially for publicly traded companies or for transfers made in the context of estate planning.
Assignment provisions typically specify the consequences of a violation. An unauthorized assignment may be deemed null and void, and in many cases, it constitutes a default under the lease that entitles the landlord to terminate the agreement or pursue damages.
Conclusion
When viewed in their entirety, commercial lease assignment provisions are far from boilerplate. They can be heavily negotiated terms that balance two competing interests: the landlord's desire to preserve financial strength, tenant mix, and control over the property; and the tenant's need for operational flexibility and exit strategies. Both sides should carefully consider the interplay of consent standards, permitted transfers, recapture rights, profit sharing, continuing liability, documentation, subleasing, change of control, and remedies for breach. Together, these elements determine just how much flexibility or control each party truly has under the lease.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
