Assignment of Lease

First, a tenant should establish in the assignment document that the assignee may not extend, enlarge or increase the tenant's liability under the lease, without the tenant's prior written consent or without causing the tenant to be released from liability under the lease. Certain situations that may cause a tenant's liability to be increased include: 1) an extension of the term of the lease, by way of negotiation between the landlord and the assignee or the exercise of an option by the assignee, which option is available to the tenant under the lease; 2) expanding the size of the premises, either by the assignee agreeing to receive additional space or by the exercise of the right of first option or right of first refusal for additional space under the lease; or 3) the assignee agreeing to perform certain maintenance or repair obligations that are not contained in the lease as tenant's obligations. In any of these situations or in similar type situations, prior to the assignee being permitted to expand the tenant's liability under the lease, the tenant should be provided notice and an opportunity to reject this expansion of the tenant's prospective liability or obligations. Further, the landlord should acknowledge in its consent to the assignment that the tenant will not incur any additional liability beyond that which is contained in the existing lease without the tenant's prior written approval.

Improvements to the Premises

Another area where the tenant can incur liability beyond what was contemplated at the time of the assignment of lease is in the area of improvements to the premises. Therefore, a tenant would be wise to require the tenant's consent prior to the assignee being permitted to perform any improvements to the premises. Often, the lease will require the landlord's consent prior to the assignee being permitted to make alterations to the premises, but this approval right for the landlord will not provide any protection for the tenant.

The reason for the need to have this protection is twofold. First, quite often the tenant is obligated to remove improvements from the premises at the expiration of the term, and the tenant will not want to take on additional potential liability for the removal of the improvements that the assignee has created. Second, the tenant will want to avoid any potential liability created by the construction work being performed by the assignee, including, but not limited to, potential mechanics' liens that the premises may be subject to for the assignee's failure to pay contractors for the work performed; liability during the construction for injuries to people; and damage to property and fines or liability imposed by landlord for the assignee's failure to follow construction rules established by the landlord. All of these situations create additional risk for the tenant, who should reserve the right to either reject by not approving the alterations or improvements or, in the alternative, by being provided with additional security from the assignee to ensure that the tenant will not be subject to additional liability based upon such construction work.

Breach By Assignee

Quite often, in assignment situations, the assignee is directly paying the landlord the rental under the lease. Therefore, the tenant would not be aware whether the assignee had failed to timely pay the landlord an amount of rental that was due and payable. As a result, the tenant should demand notice from the landlord in the event of a default by the assignee under the lease, including the assignee's failure to pay rent as required by the terms of the lease. Further, the tenant should request that the assignee provide e-mail notice each month when the rent is paid, so that the tenant can track that the assignee is timely paying rent under the lease. However this notice is provided to the tenant, there should be a system in place to ensure that the tenant can verify that the rent is being timely paid by the assignee. This notice of payments being provided by assignee to tenant should help avoid late charges or other default damages that may arise due to the assignee not timely satisfying its rental obligations under the lease. In addition, the tenant should negotiate the right with the assignee that the tenant may cure assignee's defaults and the assignee will indemnify the tenant for any expenses or damages incurred by the tenant in curing the assignee's default under the lease.

In order to ensure that the tenant is properly protected for matters arising from actions taken by the assignee or defaults under the lease created by the assignee, as stated above, the assignee should indemnify, defend (by counsel reasonably acceptable to the tenant) and hold the tenant harmless from and against all claims, damages, liabilities, attorneys' fees, costs and causes of action arising from or out of the assignee's actions under the lease. Further, the indemnification should survive the expiration of the lease in case a claim arises after the expiration of the term of the lease, but which claim accrued during the term of the lease.

Security Deposits

Finally, if the tenant has posted a security deposit with the landlord, the assignee should pay the tenant the amount of the security deposit, so that effectively the security deposit being held by the landlord is the assignee's risk, not that of the tenant. Often, a landlord will not agree to refund the security deposit to the tenant prior to the expiration of the term, even if the assignee is replacing the security deposit with its own funds. However, if the assignee pays to the tenant the amount of the security deposit, then effectively the tenant is retrieving its security deposit prior to the expiration of the term and the risk of the security deposit will be upon the assignee.

Conclusion

By carefully evaluating the relevant risks associated with the tenant being liable under the lease without the tenant being present at the premises or responsible for the payment of the rental directly to the landlord, a tenant can protect its potential liability and limit its risk in the assignment document. Otherwise, the tenant runs the risk of taking on far greater risk and liability than it ever intended when it first agreed to assign the lease to the assignee.

Glenn A. Browne, a member of this newsletter's Board of Editors, is a shareholder in the law firm Braun, Browne & Associates, P.C., Riverwoods, IL.