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Commercial Lease Assignment and Subleases Part 1: Differences and Negotiation Tactics

When a tenant assigns its lease, it transfers its entire leasehold interest to a third-party assignee for the remainder of the lease term. On the effective date of the assignment and assumption, the tenant transfers both its: (1) privity of contract, meaning the assignee now has a direct contractual relationship with the landlord; and (2) privity of estate, meaning the assignee has the sole right to possess and occupy the premises until the expiration or termination of the lease. An assignment of a lease is usually evidenced by an assignment and assumption agreement between the tenant and the assignee whereby the tenant assigns its rights and interest under the lease to the assignee and in return the assignee assumes all of the tenant’s obligations under the lease.

When a tenant subleases its lease, the tenant transfers less than all of the tenant’s leasehold estate to a third-party subtenant. With a sublease, the tenant subleases to the subtenant all or a part of its premises for a term that is less than the remainder of the lease term. In a sublease, the tenant keeps its privity of contract and privity of estate with the landlord, and remains responsible for all of its obligations under the lease, even if the subtenant is the party that causes the breach. With a sublease, the tenant transfers its privity of estate covering the subleased portion of the demised premises to the subtenant, however, because the tenant does not transfer to the subtenant its privity of contract, the subtenant: (1) has no direct contractual relationship with the landlord; and (2) must rely on the tenant to enforce the landlord’s obligations if the landlord breaches any of its representations, warranties or covenants under the lease.

In negotiating an assignment, a landlord will want to make sure it maintains control over the party that is using and occupying its premises, and limit any risks associated with the assignment of the lease to a third-party. For example, landlord may include language in its assignment clause the provides the following: (a) prohibits a tenant from assigning its lease; (b) places strict notice and consent requirements on the tenant for any proposed assignment; (c) requires tenant to split any profit with the landlord; (d) requires the tenant to pay a fee to the landlord for its consideration and processing of the proposed assignment; (e) requires the tenant to reimburse the landlord for all costs and expenses incurred by the landlord and its counsel for the review of the assignee’s financials and other documents, the assignment and assumption agreement, and the negotiation of the landlord consent; (f) gives the landlord the option to terminate the lease; (g) the tenant and any guarantor of tenant continue to remain liable for ongoing tenant obligations after the effective date of the assignment; (h) prohibits the assignee from enjoying certain benefits and rights that the original tenant enjoyed under the lease, such as self-cure rights, and right to set-off; and (i) prohibits the assignee from exercising certain options contain the lease, such as the option to expand, extend the term and purchase the property.

Just like in negotiating an assignment, when negotiating a sublease, a landlord will want to make sure it maintains control over the party or parties that use and occupy the premises. For example, landlords generally draft language in their subleasing clauses that: (a) prohibits a tenant from subleasing all or part of its space; (b) places strict notice and consent requirements on the tenant for any proposed subletting; (c) gives the landlord the option to take back the space that is subject to the sublease; (d) limits the number of subtenants occupying the space; (e) limits the number of times a tenant can sublease its space during the lease term; (f) requires the tenant to split any profit with the landlord; (g) requires the tenant to pay a fee to the landlord for its consideration and processing of the proposed sublease; (h) requires the tenant to reimburse the landlord for all costs and expenses incurred by the landlord and its counsel for the review of the subtenant’s financials and other documents, the sublease agreement, and the negotiation of the landlord consent (if required); (i) prohibits the subtenant from enjoying certain benefits and rights that the tenant enjoys under the lease, such as self-cure rights, right to off-set and a listing in the lobby directory or floor directory; and (j) prohibits the tenant from exercising certain lease options if the space is subject to a sublease such as an option to expand, an option to extend the term, and an option to purchase the property.

Landlords should carefully consider requests from tenants for approval of assignments and subleases. It may be prudent to retain experienced legal counsel to review proposed agreements to ensure that the landlord’s rights are adequately protected. Call our experienced Florida business lititgation attorneys at the Rosenthal Law Group at (954) 384-9200 today.

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