MEbiz Real Estate Insider: Lease Rights – Should Landlords Give Tenants the Right to Sublease or Assign Interest?

By Charlie Miller, real estate attorney

Charlie Miller

An issue that creates a great deal of discussion in lease negotiations relates to the right of a tenant to assign or sublease its interest in a lease to an unrelated party. This complex situation opens up several considerations for both the landlord and the tenant to address.

The landlord’s take: If the landlord is going to permit a sublease or assignment, the landlord should require that the original tenant, or assignor, stay liable and responsible for all the lease hold obligations during the full term of the lease.

The tenant’s take: If the tenant is going to stay responsible for the obligations under the lease, the tenant may argue that they should have the opportunity to mitigate its damages, or move if it outgrows its space, etc. While the tenant may agree that any right to sublease or assign its interest is subject to the landlord’s consent, the tenant also may argue that the landlord’s consent should not be unreasonably withheld, delayed or conditioned.

The answer is that the landlord is in the real estate business and the tenant is not. The landlord doesn’t want the tenant to compete with the landlord for other tenants, and it’s the landlord’s right to control the space, control the tenant mix and profit from its building(s). The tenant should make its profit from its own businesses.

Here are three options that may help resolve this issue:

• Add a provision in the leases that allows (but does not require) the landlord to recapture the space if the tenant requests to assign or sublease

• If the landlord recaptures a space, the tenant would be released from its obligations (or be allowed to assign or sublease space it no longer wants) and the landlord can profit from the space

• If a sublease or assignment were permitted, the landlord should also require that any profits of a sublease or assignment be paid to the landlord

Of course, this issue becomes much more complex depending on the creditworthiness of the tenant, the subtenant, and/or the assignee. The value of the lease for financing purposes relies heavily on the creditworthiness of the tenant and the predictable cash flow generated by the lease. Controlling the tenancies in one’s building is a critical landlord prerogative.

For more information, contact Charlie Miller, real estate attorney at Bernstein Shur.