Leasing 101, Part 8: Opportunity and Disaster in Assignments and Subleases
An assignment and sublease provision rarely has an immediate impact on a tenant at the time it signs its lease. As a result, tenants sometimes do not think through this lease section carefully during negotiation.
The assignment and sublease language becomes very important in a few circumstances, so a tenant should review this section with a consideration toward future events:
Realistically View Future Business: All tenants sign leases with the expectation that the business will do well at the location. Excitement is high, and the desire generally is to get the lease signed and the business opened as soon as possible. The reality is that the statistics for new businesses are daunting – roughly 80% of new businesses fail within the first two years. The 2009 recession showed that even solid businesses can face severe challenges when expanding the number of its locations. A sublease and assignment provision should be written to accommodate the needs of a tenant if its business does not do as well as expected.
Dumping a Losing Location: If a business fails or a site underperforms, a tenant may want to wind down operations and quickly unload the lease obligation. The typical way to do this is to sublease the site to a subtenant. The sublease provision should provide maximum flexibility in the event quick action becomes necessary. Things to look for include minimal restrictions on the type of permitted subtenant, limited landlord approval rights, and a short time period for any landlord review. In conjunction with this, a tenant also should review the permitted use section of the lease to make sure it is as broad as possible, so that prospective subtenants are not prohibited from operating at the site.
Stock and Asset Sales: If a tenant desires to sell its company, it likely will be done by a stock or an asset sale. A stock sale is the sale of the stock of the company (i.e. the buyer steps into the shoes of current management in the existing company). The lease remains unchanged because the tenant does not change. An asset sale is the sale of some or all of the assets of the company to the purchasing company, which usually forms a new entity to act as the tenant. In an asset sale, the lease is assigned to the new tenant.
No Landlord Consent: The assignment provision should be written to allow for assignment in an asset sale to be done either with no landlord consent or with very limited landlord consent. Landlord may insist on certain criteria for the new tenant entity, and they should be reviewed to make sure they are not unnecessarily problematic.
Change of Control: Selling stock of the company technically is not an assignment, but a careful landlord will identify a significant transfer of stock as a ‘change of control’ requiring landlord consent. A tenant should try to exclude a company-wide stock sale from the landlord review and consent process. However, if this is not possible, then the review criteria should be checked, similar to the assignment review criteria, to make sure they are not unnecessarily problematic.
Review Fees: The lease usually will contain a provision requiring tenant to reimburse landlord for its cost to consent to a tenant assignment or sublease. The landlord’s first draft of the lease often will have a broad reimbursement provision. A few things to consider: the consent fees can be capped, they could be limited to out-of-pocket third party costs (rather than landlord charging for its own time to review), and they can be limited to legal fees only. The review fee cost often comes as a surprise to tenants who have not bothered to look at the sublease and assignment section until they are in the midst of such a transfer.
A lease is a multi-year commitment, and it is very important to think through the terms not only in light of tenant’s present day needs but also tenant's needs (sometimes urgently) years in the future.