Video: Assigning a Lease & Landlord Approval
Start Transcript: Assigning a Lease & Landlord Approval
Let’s say that you are a commercial tenant. You have leased, let’s say it’s a pad in a shopping center that you are going to use as a restaurant, and you’ve got your restaurant in there for two or three years. Things are great or things are terrible. Either way, you want to assign this lease. You’ve decided you’re going to do something else now. You need to look at your lease agreement that you have with the landlord and determine whether the lease is assignable, and in most cases it will be, but usually there are some conditions on the assign-ability of that lease.
Normally the landlord gets and opportunity to approve or reject the proposed new tenant that you want to bring into the space. You’ve got your, let’s say it’s a pancake restaurant, and you’ve got the best pancakes in town, and the landlord really likes you in there because you’re a good tenant. You always pay the rent on time, and they love having tenants like you in that space. But they also know that not everybody is as good as you at doing what you do, so they’re a little concerned about this plan you’ve got to assign your lease to somebody else and have somebody else take over your pancake shop, because they might not do it as well as you.
You approach the landlord and say, “Hey, I’ve been a great tenant. Now I want to bring in Chip, who’s going to run the pancake shop.” The landlord says, “No, I went into business with you. I trust you. I don’t trust Chip. Chip’s the kind of guy that leaves you hanging.” The landlord may have some real reluctance to doing that, and they do have veto authority on that in most cases.
You may need to do something to sweeten the deal for the landlord. Maybe there’s an increase in the rent. Maybe there is some cash payment by you to induce the landlord to approve the assignment of the lease. It almost sounds like a bribe, doesn’t it? But it’s not. That is a bargained for, perfectly appropriate term that a landlord can demand in connection with whether they want to allow for the assignment of a lease.
Usually if the lease is drafted properly and in a way that’s not totally one-sided for the landlord, it will include language like, “Landlord’s approval to assign the lease shall not be unreasonably withheld.” That’s one of those terms that lawyers can fight about for years, of course. Neither side wants to end up in years of litigation, so having a term like that does give the tenant some negotiating power. If, instead of having Chip take over as the restaurateur, you have some very well established restaurant who has tremendous credit and is not a real credit risk for the landlord, then it’s probably not reasonable for them to withhold approval of the assignment of the lease in that case. That’s one of the issues that you need to be involved with when you’re talking about assigning a lease.