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Landlord Considerations When Drafting Assignment and Subletting Provisions
Restricting a tenant's right to transfer the property it is leasing to a third party is a key component to any lease. Most landlords want to limit the tenant's ability to encumber the lease so that the landlord has control over who is occupying their property. In addition, a landlord may also need to get its lender involved because many lenders require landlords to obtain lender consent before the transfer is effective. Failure to obtain such consent could lead to a landlord's default under the terms and conditions of the loan documents, so it is imperative for a landlord to review its loan documents each time it receives a request from a tenant to transfer its interest under the lease.
Types of Transfers
The four ways tenants generally transfer their interest under the lease are via: 1) an assignment of the lease; 2) a subletting of the premises; 3) mortgaging its interest under the lease; and 4) giving a third party a license to occupy space within the leased premises. Landlords typically prohibit the right of tenants to encumber the leased property through a mortgage (except in the case of a ground lease). Although licenses are a method of dealing with the use of a property on a short-term basis, only in rare instances does a "standard" landlord lease form permit a tenant to enter into a license agreement with a third party unless the deal specifically calls for such a transfer. The most common ways a tenant transfers its interest in a lease are by way of an assignment or a sublease.
Landlord Consent and Recapture Right
Most landlords do not want just anyone occupying their property and require the tenant to obtain the landlord's consent before the leased premises is assigned or sublet. Landlords, in most cases, agree that such consent shall not be unreasonably withheld, delayed or conditioned. Many of the more sophisticated landlords provide, however, that the landlord has the right to recapture (with the option, in some cases to also sublease back) the space that the tenant is leasing.
In any event, many landlords specifically require a tenant to provide the following documents after a tenant submits written notice to a landlord requesting an assignment or sublet: 1) a copy of the proposed assignment or sublease, requiring that the effective date be not less than a certain number of days (typically 30-60 days) and no more than a certain number of days (typically 120-180 days) after the giving of such notice; 2) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the premises; and 3) current financial information with respect to the proposed assignee or subtenant, including its most recent financial report certified by a certified public accountant.
If a recapture (and in some cases a sublet back) option is desired, then the notice is usually deemed to be an offer to either terminate the lease and recapture the premises or sublet the premises back to the landlord. Note also that landlords often accept, in lieu of a copy of the sublease or assignment agreement, a term sheet from the transferee outlining the material terms of the proposed sublease or assignment, including the proposed use and the effective date of the transaction.
Conditions for Transfer
If the landlord does not elect to recapture or sublease back the space, it is advisable for a landlord to state that it will not unreasonably withhold its consent to the tenant's request to sublease or assign, provided certain enumerated conditions are met.
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