Lease Assignment in Commercial Real Estate

What is a Lease Assignment?

A lease assignment occurs when a tenant fully transfers their lease to another party. This is particularly important for tenants who wish to get out of their leases early due to financial issues, especially if a landlord does not allow subleases. In general, the landlord must agree to the lease transfer, and usually records their consent to it via a document called a “license to assign.”

However, a landlord is generally required to give what’s called “reasonable consent” when deciding whether to allow a tenant to assign a lease or find a new tenant to sublease the property. For example, as long as potential (new) tenants have good credit and strong financials, a landlord should not arbitrarily deny the original tenant the ability to assign the lease or provide a sublease. In addition, some leases have a clause which stipulates the specific time period in which a landlord must decide whether to approve a new tenant for lease assignment.

The Differences Between Subleases and Lease Assignment

In a sublease, the tenant is still responsible for fulfilling all aspects of their lease agreement, including paying rent. In many subleases, the original tenant actually collects rent directly from the subleasing tenant and pays it to the landlord, though this is not always the case. In a lease assignment, a legal relationship is created directly between the landlord and the new tenant, which means that the new tenant will be directly paying rent to the landlord.

Lease Assignment and Tenant Liability

However, unless the original tenant is fully released from their liability by the landlord, they will be legally liable if the new tenant defaults. This means that, while a lease assignment is great for many tenants, it still carries some risks— as a landlord could sue the original tenant for back rent if the new tenant failed to pay. In general, smart landlords will be especially picky about which tenants they allow, and will typically want to ensure that the new tenant is at least as creditworthy as the previous one. Creditworthiness may be measured in EDBITA, business net worth, or other metrics. In many cases, they also want to know that the leased property is at least somewhat important to the new tenant’s business operations— otherwise, the tenant may be more likely to let the property fall into disrepair, or, even worse, default on their lease.

Landlords may be especially picky in their choice of tenants when it comes to triple net leases, as they are often trying to reduce their financial liability as much as possible. However, if the tenant is smart, they will have already hashed out much of these requirements while negotiating their initial lease agreement. This should cut down the amount of surprises for all parties involved and make it far easier for the current tenant and landlord to find a suitable replacement.

Lease Renewal and Recapture Clauses

In most cases, landlords will offer a lease renewal option to tenants in their original lease contract. However, in many cases, this lease renewal option is not extended to tenants who are assigned a lease. This can make it extremely difficult for tenants to assign a lease if there is only 1-2 years left on their lease. However, like nearly everything else, this can be negotiated during the initial lease agreement process.

In addition, tenants should be aware that many commercial leases have a recapture clause, which can allow a landlord to immediately terminate a lease if a tenant asks for a lease assignment. This benefits landlords, as they can take back control of their property if they believe the current tenant is too high of a credit risk, but can be disastrous for a tenant. Often, a recapture clause can only be triggered under certain conditions, such as the closure of the tenant’s business for a certain period of time.

Additional Lease Assignment Requirements

While a sublease can be for only part a leased premises, in most cases, a lease assignment must be for the entire premises. For instance, if a tenant leasing a 10,000 sq. ft. property wanted to lease out only 4,000 sq. ft. to another party, they would typically have to do so through a sublease rather than via a lease assignment.

Finally, some leases also stipulate that if a lease is assigned to a new tenant, and the original tenant profits (usually due to the sale of the business), the landlord has a right to a certain share of those profits.

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