ASSIGNMENT AND SUBLETTING OF COMMERCIAL LEASES
Consistent with the public policy favoring free alienability of property, absent any restrictions in a commercial lease, the tenant is free to assign its interest to a third party, or to sublease all or any portion of the leased premises. An assignment transfers all of tenant’s rights under the lease for the remainder of the term. A sublease transfers certain rights of tenant, subject to tenant’s retention of its reversionary interest in the leased premises before the end of the term.
Upon an assignment, so long as landlord has not expressly released the assigning tenant from liability under the lease, the tenant remains liable for all covenants in the lease. For example, if the assignee fails to pay rent or taxes, while the landlord can enforce the lease covenants against the assignee, the landlord can also collect those amounts from the assigning tenant. In the context of a sublease, notwithstanding sublessee’s possession of the leased premises, the landlord has no rights to enforce the lease against the sublessee, as its lease relationship with the tenant is not affected by the sublease. A termination of the lease effects a termination of the sublease.
Nevertheless, most commercial leases have fairly extensive provisions governing assignments and subleases, including the requirement of landlord’s consent. So long as the restrictions against assignments and subleases are reasonable, clear and unambiguous, they will be enforced. Any such restrictions will be strictly construed against the landlord. For example, to the extent that the lease simply includes a general prohibition against tenant assigning its interest in the lease, the tenant should be free to sublease, license or provide a third party with the right to occupy the leased premises. In addition, the lease must expressly address the effect of an admission of a new partner or member or withdrawal of an existing partner or member for a partnership tenant, or a limited liability company tenant. And the lease must include a provision that a change in control of the tenant constitutes an assignment requiring landlord’s consent, as such circumstances will not be inferred from a general restriction on assignment.
Indeed, the AIR form lease agreement includes fairly comprehensive restrictions on the ability of a tenant to assign or sublease its interest. Assignments and subleases are prohibited without landlord’s prior written consent. A change in 25% or more of the voting control of tenant, and if the stock of a tenant is publicly traded, a change in control of tenant, constitute assignments requiring consent. A reorganization of tenant resulting in a reduction of its net worth by more than 25% is included as an assignment requiring landlord’s consent.
A lease that includes an absolute prohibition against assign or sublease is enforceable. To the extent that the lease includes standards or conditions to the right of tenant to assign or sublease, those provisions will be enforced, so long as landlord acts reasonably and in good faith in its determination as to whether the standards or conditions have been satisfied. If the lease requires landlord’s consent to assignments and subleases, but does not include standards (for example, not to be unreasonably withheld) for such consent, it will be inferred that landlord will not withhold its consent unreasonably.
In all events, care should be taken to clearly articulate the circumstances where a tenant can assign or sublease its interest in a lease.
VIEWS EXPRESSED ARE THE PERSONAL VIEWS OF THE AUTHOR AND DO NOT REPRESENT THE VIEWS OF ROBERT THORNBURGH, KIDDER MATHEWS, LOCKE LORD LLP, ITS PARTNERS, EMPLOYEES OR ITS CLIENTS. FURTHERMORE, THE INFORMATION PROVIDED BY THE AUTHOR IS NOT INTENDED TO BE LEGAL ADVICE AND DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP.
