Assignment & Subletting

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Assignment and Subletting: Transaction Basics Assignment:

Conveyance of the Entire Leasehold

a General Rule: Original tenant (assignor) is not relieved of liability under the lease merely by assignment; the landlord must expressly release the assignor.
  • Liability: New tenant (assignee) becomes liable for matters accruing after the assignment, when privity of estate has been created, unless assignee expressly assumes all lease obligations (which will include prior unfulfilled obligations).
  • Assignment is the preferred transaction form for a new tenant.
  • Leasehold MortgageCollateral assignment of a Leasehold Estate to a secured party; upon foreclosure of the mortgage, the secured party steps into the role of tenant.

Sublease:

Creation of   a Subordinate Leasehold

  • Sublease: The creation of brand new “sub“-leasehold estate between sublandlord and subtenant, granting the subtenant the right to use some or all of the sublandlord’s “prime” leasehold estate.
  • Issue:    An assignment of all of the sublandlord’s rights under the prime lease may be deemed an assignment pro tanto.
  • Sublease is the tenant/sublandlord’s preferred transaction form.
  • License: Similar to a Sublease, but is a limited grant of rights to enter and use space, rather than conveyance of a real property interest (Lease).

The Prime Lease:

The Limiting Factor

  • The Prime Lease establishes the outer boundaries of the rights and interests in the lease premises that are to be sublet or assigned.
  • While a subtenant is not bound to perform all obligations in the Prime Lease, a subtenant is limited by any express restrictions in the Prime Lease.
  • Practical Point: It is essential for tenants to consider and address any prospective assignment and subletting rights and needs when negotiating the Prime Lease.  Landlord will have no obligation under Oregon law to act reasonably and consent to assignments and subletting after the lease is signed.

Master Landlord’s Form of  Consent:

A Complicating Factor

  • Master landlord will use the consent process as an opportunity to extract certain additional agreements and assurances from the proposed subtenant, as well as the tenant.
  • Issues master landlords might raise in their consent letters:
  • Landlord protections
  • Restrictions on modification of the sublease
  • Confirm sublandlord remains liable under the lease
  • Allow rent to be directly collected from subtenant
  • Allow landlord to elect to keep subtenant if the “prime” tenant defaults
  • If representing a subtenant, ask to see this as early as possible.

Practical Considerations:

The Tenant’s Perspective

  • Exit Strategy:     Need the option to walk away from or mitigate a major financial obligation.
  • Business Transitions/Sales: Lease is often a major “asset” inconnection with operation of client’s business.
  • Financing: Tenant will want the freedom to bring in additional investors or to raise additional capital by issuance of equity.

Practical Considerations:

The Landlord’s Perspective

  • Control: Landlord wants to control what tenants are occupying the building or larger complex.
  • Retail Specific Issues: Co-Tenancy Requirements; Non-Competition; Tenant mix
  • Financial Viability:    Landlord wants to ensure that the successor tenant can fulfill the Lease obligations.
  • Building Rents:    Landlord wants to control and protect against competition and low rental rates for vacant space in the building.

Practical Considerations:

The Subtenant’s Perspective

  • Confirm the terms and provisions of the Prime Lease.
  • Consider seeking a non-disturbance right from the master landlord in the event of a default under the Prime Lease.
  • Consider the Master Landlord’s financial condition and confirming the prime tenant/sublandlord has non-disturbance rights vis-à-vis Master Landlord’s lender, in case of a foreclosure upon the building.

Practical Considerations:

De Facto Assignment and Subletting Restrictions in Leases

  • Overly Strict Limitations on Permitted Uses a Inability to Make Non-Structural Alterations a Signage Issues
  • Unreasonable conditions to Landlord’s agreement to consent

Assignment and Subletting: Major Negotiating Points

Landlord’s Form Lease:

The Starting Point

a General Rule: Leases are generally assignable, absent restrictive language or unique circumstances surrounding the Lease.
  • What is typically prohibited in Landlord’s form:
  • Assignments
  • Subleases
  • Encumbrances
  • Occupancies
  • Transfers of Control
  • In aiming to prohibit these activities in as broad a manner as possible, Landlords invariably inhibit Tenants’ ability to engage in important activities with respect to the Lease.

Landlord’s Consent to Transfers:

Is Reasonableness Enough?

Potential Issue:   The timing and structure of the consent process iseither undefined, or defined in a manner that effectively kills prospective sublease deals.

Potential Issue: Landlord is required to reasonably consent, but Tenant’s sole remedy for a breach of this obligation is injunctive relief.

Potential Issue:    Facts and circumstances surrounding the lease and tenant allow Landlord sufficient berth to generate a “reasonable” excuse.

Potential Issue:    The Lease enumerates standards of reasonableness that make consent difficult to obtain.

Exceptions to Consent

  • Sale of the Business
  • Merger / Consolidation / Reorganization
  • Affiliate Transfers
  • Certain Transfers by Operation of Law
  • Other transfers not principally aimed at transferring the Lease
  • Net Worth Test
  • At lease equal to worth immediately before assignment.
  • At lease equal to larger of (i) net worth when lease was signed, or  (ii)prior to assignment.

Right to Recapture upon Assignment/Sublease Request

  • Landlord’s Perspective: Tenant no longer wants / needs the space, so Tenant should not be averse to returning the space.
  • Landlord’s Motivation: Capture 100% of higher rental rates
  • Timing:  When is the recapture right triggered? (Notice of intent?
  • Notice of actual offer? Presentation of actual deal?)
  • Timing, part 2:    How long may Landlord take to make the decision?
  • Structure:    Will recapture be a sublease back to Landlord, or atermination of the lease as to the recaptured space?
  • Should the tenant have the right to rescind, if Landlord elects to terminate?

Participation in Profits by Landlord

  • Philosophical Issue:   Should the landlord have this right?
  • Practical Issues:
  • What is the correct percentage?
  • How are tenant’s subletting costs to be recaptured (immediately vs. over the life of the sublease)?
  • Costs to include or exclude?
  • Are carrying costs a permissible exclusion?
  • Is the profit to be shared calculated pro rata relative to the space sublet?