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Assignments and Collateral Assignments of Commercial Leases
There are differences between assignments of leases and collateral assignments of leases, and each has aspects that parties to these agreements should expect and look out for. Let's discuss some of these issues.
Commercial Lease Assignments
An assignment of lease agreement is a contract to effectuate a transfer to an assignee of title and rights to certain real property held by a lessee or tenant pursuant to a lease. There are varying reasons why a tenant may want to assign the lease. Most often, a tenant will look to assign its lease in the event that its business is failing and they can no longer pay rent, or the tenant is selling its business and the purchaser would like to take over the commercial space to operate the business (sometimes the reason may be a combination of these). While it may seem that a landlord would not object to an assignment so long as the rent is still being paid, landlords often want control over lease assignments, to protect themselves from incoming assignees that may not be credible tenants.
Assignment provisions in a commercial lease are usually coupled with subletting provisions, though the two concepts are not one in the same. When a tenant sublets its premises to a subtenant, privity of contract is not created between a sublessee and a landlord. In the case of an assignment, the assignee assumes the lease as the new tenant and privity with the landlord is created. In some cases, but not all, the assignor may be released.
The language dictating a tenant's assignment rights is typically drafted to require landlord's prior written consent to an assignment; a breach of such clause would be a default under the lease and the assignment would be invalid. In addition to this consent buffer, a landlord may reserve for itself the right to review an assignee's financials and proposed assignment of lease agreement prior to its consent. Reviewing financials helps a landlord make an informed decision about a potential assignee and assess if they would be a good fit as a tenant in its building. Reviewing the proposed assignment of lease agreement allows the landlord to assure that the incoming tenant is assuming all obligations and liabilities under the lease.
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