Landlord Considerations When Drafting Assignment and Subletting Provisions

Some of the conditions to subleasing or assignment that are often found in leases include: 1) that the proposed assignee or subtenant is engaged in a business and the premises will be used in a manner that is in keeping with the building's standards and/or with the standards of comparable buildings in the vicinity of the building, which use should be limited to the use of the premises for the original use permitted under the lease, which will not violate any negative covenant as to use contained in any other space lease in the building; 2) that the proposed assignee or subtenant is reputable and of good character with sufficient financial worth considering the responsibilities involved; 3) that the proposed assignee or sublessee is not a person with whom the landlord is then negotiating space in the building; 4) that the form of the proposed sublease or instrument of assignment is reasonably satisfactory to landlord; 5) that the tenant reimburse the landlord for the costs that may be incurred by the landlord in connection with such transfer request; 6) that the proposed subtenant or assignee shall not be entitled to diplomatic or sovereign immunity and shall be subject to service of process in, and the jurisdiction of the courts in, the state where the property is located; and 7) that the tenant, and any guarantor, if applicable, shall remain fully liable even after the proposed transfer. In some instances, it may also be prudent to require that any sublease shall be a sublease for all of the premises, especially if the sublet space is very small.

If the landlord does not include any specific conditions that must be adhered to before the landlord consents to a proposed transfer, it could encourage a tenant to contest that the landlord is being reasonable if the landlord denies consent to a proposed transfer. So long as the lease sets forth explicit conditions that must be satisfied, the failure to comply with any of these conditions can give rise to a valid reason why the landlord denied the tenant's request to assign the lease or sublet the premises.

Remember to also state that no subletting shall be for a term ending later than one day prior to the expiration date of the lease, and that the sublease specifically provides that it is subject and subordinate to the lease. Moreover, a tenant should agree, in most instances, to be jointly and severally liable to the landlord for the performance of the obligations of the assignee.

If an assignee or its guarantor has a net worth at least as great as the tenant, a landlord may consider waiving joint and several tenant liability. If a "net worth" standard is used, make sure that net worth is deemed to mean an entity's equity, as reported in such entity's annual financial statements, less the "intangible" assets, including, but not limited to, copyrights, trademarks, trade names, licenses, patents, franchises and goodwill, as the entity's net worth can often be inflated by these intangible items and are hard to quantify.

Sharing Profits

A landlord may also consider adding that the landlord keeps all or a portion of any "profits" made by a tenant as a result of a sublease or assignment. The rationale is that, unlike a landlord, a tenant is not in the business of renting property, and that any profits that a tenant makes as a result of such a transaction should at least be split with the landlord.

Although it may be tempting for a landlord to seek to keep all of the profits, it may make more sense to share some of the profits with the tenant so as to give the tenant an incentive to assign the lease or sublet the premises and make a profit while doing so.

A landlord should be careful, however, if a portion of only the "net" profits are to be given to the landlord, that a tenant include as part of the consideration paid by the transferee all sums paid for the sale of tenant's furniture, fixtures, equipment and other personal property (less, in the case of a sale thereof, the then net unamortized or undepreciated cost thereof determined on the basis of tenant's federal income tax returns). If the landlord does not include a provision related to the sale of such items, a tenant may be tempted to reduce the rental amount accepted in connection with the sublease or assignment and instead raise the price of items sold to the transferee, thereby reducing the profit that it has to split with the landlord.

Conclusion

Certainly, there are many other things that can be considered in crafting assignment and subletting provisions, but if the above items are included in a landlord's form lease, a landlord will be well on its way to protecting its interest in the event a tenant seeks to transfer its interest to a third party.

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Mark Morfopoulos is a real estate attorney with Wachtel Missry LLP in New York. A member of this newsletter's Board of Editors, he can be reached at 212 909-9541 or [email protected].