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Lease Assignment in Commercial Real Estate
A lease assignment occurs when a tenant fully transfers their lease to another party. This is particularly important for tenants who wish to get out of their leases early due to financial issues, especially if a landlord does not allow subleases. In general, the landlord must agree to the lease transfer, and usually records their consent to it via a document called a “license to assign.”
- What is a Lease Assignment?
- The Differences Between Subleases and Lease Assignment
- Lease Assignment and Tenant Liability
- Lease Renewal and Recapture Clauses
- Additional Lease Assignment Requirements
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What is a lease assignment in commercial real estate?
However, a landlord is generally required to give what’s called “reasonable consent” when deciding whether to allow a tenant to assign a lease or find a new tenant to sublease the property. For example, as long as potential (new) tenants have good credit and strong financials, a landlord should not arbitrarily deny the original tenant the ability to assign the lease or provide a sublease. In addition, some leases have a clause which stipulates the specific time period in which a landlord must decide whether to approve a new tenant for lease assignment.
While a sublease can be for only part a leased premises, in most cases, a lease assignment must be for the entire premises. For instance, if a tenant leasing a 10,000 sq. ft. property wanted to lease out only 4,000 sq. ft. to another party, they would typically have to do so through a sublease rather than via a lease assignment.
Finally, some leases also stipulate that if a lease is assigned to a new tenant, and the original tenant profits (usually due to the sale of the business), the landlord has a right to a certain share of those profits.
What are the benefits of a lease assignment in commercial real estate?
A lease assignment in commercial real estate can be beneficial for tenants who want to transfer their lease to another party. Benefits include:
- The ability to transfer the entire leased premises, rather than just part of it.
- The potential to make a profit from the sale of the business.
- The ability to find a suitable replacement tenant.
- The potential to reduce financial liability for the landlord.
It is important to note that the original tenant may still be liable if the new tenant defaults, unless the landlord releases them from their liability. Additionally, landlords may be picky about which tenants they allow, and may want to ensure that the new tenant is at least as creditworthy as the previous one. Creditworthiness may be measured in EDBITA, business net worth, or other metrics. Source
What are the risks associated with a lease assignment in commercial real estate?
Lease assignments in commercial real estate carry some risks for the original tenant. Unless the original tenant is fully released from their liability by the landlord, they will be legally liable if the new tenant defaults. This means that the landlord could sue the original tenant for back rent if the new tenant fails to pay.
In addition, landlords may be especially picky in their choice of tenants when it comes to triple net leases, as they are often trying to reduce their financial liability as much as possible. They will typically want to ensure that the new tenant is at least as creditworthy as the previous one. Creditworthiness may be measured in EDBITA, business net worth, or other metrics. In many cases, they also want to know that the leased property is at least somewhat important to the new tenant’s business operations— otherwise, the tenant may be more likely to let the property fall into disrepair, or, even worse, default on their lease.
What are the legal requirements for a lease assignment in commercial real estate?
A lease assignment occurs when a tenant fully transfers their lease to another party. The landlord must agree to the lease transfer, and usually records their consent to it via a document called a “license to assign.”
What are the steps involved in a lease assignment in commercial real estate?
The steps involved in a lease assignment in commercial real estate are as follows:
- The tenant must fully transfer their lease to another party.
- The landlord must agree to the lease transfer and usually records their consent to it via a document called a “license to assign.”
- The landlord is generally required to give what’s called “reasonable consent” when deciding whether to allow a tenant to assign a lease or find a new tenant to sublease the property.
- The landlord must decide whether to approve a new tenant for lease assignment within a specific time period, as stipulated in the lease.
- In most cases, a lease assignment must be for the entire premises.
- If the original tenant profits (usually due to the sale of the business), the landlord has a right to a certain share of those profits.
What are the common mistakes to avoid when assigning a lease in commercial real estate?
When assigning a lease in commercial real estate, it is important to ensure that the new tenant is at least as creditworthy as the previous one. Creditworthiness may be measured in EDBITA, business net worth, or other metrics. Additionally, the landlord may want to ensure that the leased property is at least somewhat important to the new tenant’s business operations. It is also important to note that a lease assignment must be for the entire premises, and not just part of it. Finally, some leases also stipulate that if a lease is assigned to a new tenant, and the original tenant profits, the landlord has a right to a certain share of those profits.
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Assignment Of A Lease: Everything You Need To Know! 📃
Sep 04, 2023 | Shakeel Mir
There are are plenty of reasons why you might want to exit your commercial lease early. Perhaps your current premises are no longer suitable for the needs of your growing business, or maybe your business is in financial difficulty and you need to find a lease with more favourable terms.
There are also plenty of options when it comes to deciding how to exit a lease before the specified end date. Some of the most common include: assignment of a lease, which involves passing the lease onto another business; terminating the lease, with the help of a break clause if your contract contains one; or subletting your premises and adopting the role of landlord yourself.
Unfortunately, exiting a lease early is not always a simple process. A lease is a legal contract, and if you break it your landlord could take you to court. Opting to pursue a process such as assigning the lease to a new tenant can make exiting a lease early possible, but there are many factors that should be considered before beginning this process.
If you are thinking of trying to leave your lease early, it is advisable to obtain independent legal advice from an appropriately experienced commercial property solicitor before taking any action.
If you require legal advice or assistance on getting out of a commercial lease please call us on 0800 086 2929 , email [email protected] or complete our Free Online Enquiry Form .
In addition to office meetings, we also offer remote meetings via telephone and video conferencing software so can assist you wherever you are based.
What is assignment of a lease?
The process of assignment of a lease is essentially selling the lease to a third party (the “assignee”).
If you are a commercial property tenant, your contract likely contains a clause that allows you to assign your lease to a new tenant. To do this, you will need to find a potential new tenant yourself. Your landlord will expect this new tenant to meet the same expectations they originally set for you, and you will probably need their consent before the assignment can be completed.
While your landlord cannot reasonably withhold their consent for the assignment, they are under no obligation to give their consent if the new tenant doesn’t meet the terms set out in your contract – so it’s wise to be picky yourself about the tenant you select.
There are likely to be restrictions around when and if you can assign your lease specified in your contract. Some common restrictions include not allowing lease assignments if the contract is for a short period, and not allowing the lease to be assigned if the lease is ending within a few years.
Once a lease as been assigned, the assignee will become the new tenant and will be responsible for ensuring compliance with all of the tenant’s obligations in the lease.
What checks will a landlord make before permitting assignment of a lease?
Your landlord will want to see evidence – usually in the form of business bank account statements – that the new tenant is in a strong financial position
Statements from previous landlords that the tenant has leased property from will be required to show that the tenant is reliable and doesn’t have a history of missing payments or otherwise neglecting their responsibilities as a tenant
Proposed use of the premises
Your landlord will probably be looking for a new tenant to intend to use the premises in broadly the same way as you have done in the past as the lease will specify what use is allowed.
Likelihood of requesting alterations to the building
As above, your landlord will require advanced notice of any alterations the new tenant may wish to make to the premises, and in some cases written permission in the form of a Licence to Alter will be required. It is likely that they may withhold their consent for assigning the lease to any tenant intending to make large-scale changes depending upon the type of premises involved.
What liabilities will you have when assigning a lease?
It is important to recognise that the assignment of a lease to a new tenant does not automatically exempt you from all liabilities related to that tenancy going forwards. In fact, once the lease assignment is complete you can still be liable should the new tenant miss any payments or otherwise break the terms of their contract.
Exactly what you will be liable for depends on when your lease began. If your lease began before January 1996 you will remain liable for all payments by any subsequent tenants – even if the lease is assigned several more times after you. This is called “privity of contract”.
For leases that began after January 1996, you will be required to sign an Authorised Guarantee Agreement . This means you guarantee payments for the next tenant, but not any further tenants.
Landlords can only claim payments of rent within six months of the money being due, and only after full notice has already been served to the former tenant.
What does lease assignment cost?
On the other hand, if the rent under the new lease is below the market rate, the new tenant may instead want to pay you a premium. If this is the case, you’ll need to make a decision on whether to charge VAT – or “opt to tax” – something that’s worth getting professional advice on.
A final charge to be considered is the cost of this advice. It is highly recommended to involve your solicitor when opting to pursue a lease assignment so as not to inadvertently break the terms of your contract and leave yourself open to court action. You should therefore also factor solicitors’ fees into your calculations when considering the cost of exiting your lease.
How to get out of a commercial lease – what are the alternatives?
Assignment of a lease is not the only way to get out of a commercial lease and depending on your circumstances and the contract you have with your current landlord, it may not always be the best option.
Some alternative ways to get out of a commercial lease early include:
Using a break clause
Some lease contracts include a “break clause” which offers both parties the opportunity to end the lease early in certain circumstances. Read your contract carefully to check if it contains a clause like this, and if it does, what terms and conditions are involved. Any time limits specified in the lease for giving of notice must be strictly followed.
Negotiating a lease exit
If your contract does not include a break clause, your landlord may still be open to you exiting the lease early. You would need to negotiate the specific terms of your exit and your landlord may require a pay-out to offset the inconvenience of having to market the property again.
Compared to lease assignment, negotiating an exit from your lease should provide a clean break with no further liabilities, but we would recommend seeking legal advice to confirm that you were exiting the contract cleanly.
Subletting the premises
A final option to consider when looking at how to get out of your commercial lease early is subletting. If your contract allows it, you can take on the role of landlord by finding and leasing your property to a new tenant.
You can use the rent payments from your new tenant to cover your own obligations, but in return you’ll be expected to take a hands-on role managing the property and dealing with the sub-tenant directly.
Need assistance with assignment of lease?
Exiting a lease early can be a complex process, whether you choose to do so by arranging the assignment of your lease or by one of the other means mentioned above.
Lease assignment is an effective way for tenants to get out of a commercial lease early. However, this can be a slow process and you will incur costs.
Contacting a solicitor at an early juncture is advisable so that you are appropriately advised at the outset of any key considerations and potential pitfalls. For example, even though you are selling the lease, you could potentially remain liable afterwards; this will depend on the age of the lease and whether you have entered into an authorised agreement or not.
Shakeel Mir is the Head of our Commercial Property department and has many years of experience in dealing with lease assignment. He is based in our Amersham office but assists and advises clients all over the country. In addition to office meetings, Shakeel offers remote meetings via telephone or video conferencing software so can assist you wherever you are based.
Make a Free Enquiry
If you are considering how to get out of a commercial lease or have any queries relating to any of the issues discussed in this article, please get in touch with Shakeel by calling 0800 086 2929 , emailing [email protected] or completing our Free Online Enquiry Form .
The content of this article is for general information only. The information in this article is not legal or professional advice. If you require legal or professional advice you should obtain independent expert advice from qualified commercial property solicitors such as those within our firm .
Call us 24/7 on 0800 086 2929 , email [email protected] , or complete our Free Online Enquiry Form to arrange a free, no-obligation discussion and let us explain your legal rights and options.
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Assignment And Assumption Of Lease
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What is an Assignment And Assumption Of Lease?
An assignment and assumption of lease is a legal real estate document that allows one party to transfer rights and obligations of a lease to another party. Often used in real estate transactions and mortgage lending, the assignment and assumption of lease agreement requires the landlord to consent to move forward.
An assignor may include an assumption agreement to provide legal protection by transferring obligations to the new tenant. For example, if a tenant defaults on a mortgage or stops paying rent, the original seller is no longer liable. Assignment and assumption of lease agreements cover terms like who is newly responsible for the lease and the landlord's contract for this agreement.
Common Sections in Assignment And Assumption Of Leases
Below is a list of common sections included in Assignment And Assumption Of Leases. These sections are linked to the below sample agreement for you to explore.
Assignment And Assumption Of Lease Sample
Reference : Security Exchange Commission - Edgar Database, EX-10.2 2 d425646dex102.htm ASSIGNMENT AND ASSUMPTION OF LEASE , Viewed October 18, 2021, View Source on SEC .
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Navigating the assignment of a commercial lease
Special circumstances can require a tenant or a landlord to assign a commercial lease. Find out the most common situations for a commercial lease assignment and whether it's right for your situation.
updated November 29, 2023 · 3min read
- Tenant's assignment of a commercial lease
- Getting the landlord's consent
- Contents of a tenant's assignment agreement
- Landlord's assignment of a commercial lease
If you're running a business, you may find yourself in a situation where you need to break a commercial lease. As a tenant, one option is to assign the lease, which means removing yourself completely from the lease and transferring it to a third party.
There are also instances when a landlord may need to assign a commercial lease, such as when a property is sold. In doing so, you sell the building with any leases intact, which requires assigning your right to collect rent to the new owner.
Tenant's assignment of a commercial lease
There are many reasons a tenant may want to get out of a commercial lease, including not being able to afford the rent and needing less or more space. Because it's unlikely a landlord will simply let you walk away from your commitment, you should check what your lease says about early termination. Most commercial leases require the tenant to pay rent for the rest of the term and possibly additional fees for breaking the lease.
Assignment of the lease is another alternative to breaking it. In doing so, you give the new tenant, known as the assignee, the right to occupy the premises in your place for the remainder of your lease term.
Getting the landlord's consent
Almost all assignments of commercial leases by the tenant need the landlord's consent, so check your original lease for any such language. As with a residential lease, a landlord cannot unreasonably withhold consent for you to assign the lease. However, it's up to you as the assignor, or original tenant, to ensure that your assignee is reliable, responsible, and can pay the rent—or you may end up being held financially liable.
If the tenant assigns a commercial lease to a new tenant without the landlord's permission, the landlord can sue the original tenant for breaking the lease. The landlord can also collect damages against one or both tenants if he can show that the assignee isn't a good-paying tenant or doesn't have the type of business he wants in the building. He can also end the lease and evict the new tenant.
Contents of a tenant's assignment agreement
Assignment of a commercial lease is almost always accompanied by a written agreement to preserve both the tenant's and landlord's rights. Some states require written assignment agreements . Many commercial assignment agreements contain provisions for the:
- Payment of fees to the landlord for having another business substitute for yours
- Assignor's and assignee's names, addresses, and business names
- Landlord's name, address, and business name
- Amount of the new tenant's rent and the dates for payment
- Date of the agreement
- Date the assignment is effective
- Date the lease ends
- The landlord's, assignor's, and assignee's signatures
Assignment agreements usually don't contain a provision releasing the assignor from paying rent, meaning that you, as the assignor, are held responsible for payment. Even so, assignment can be a financially responsible option for a tenant who's going out of business or who needs new space immediately.
Landlord's assignment of a commercial lease
Sometimes a commercial landlord needs to sell his property. After the new owner, or assignee-buyer, buys the property subject to existing leases, the assignor-landlord assigns the leases to the new owner, who can then collect rent. The assignor-landlord notifies tenants by sending a notice of sale, a notice of assignment of lease, or a notification on letterhead listing the assignee-buyer's address for payment of rent.
Unless the lease states otherwise, you, as landlord, can sell your property to anyone, but make sure to get a hold harmless clause , also known as an indemnity clause, in your contract of sale. Such clauses protect you from liability to the tenant if the buyer doesn't perform her duties as a landlord. Otherwise, as the original landlord, you're still liable for your obligations to the tenant, such as keeping the premises habitable.
Under the right circumstances, assignment of a commercial lease can work for both landlords and tenants. If you need assistance with your assignment agreement, consider using an online service provider to prepare it for you.
by Ronna L. DeLoe, Esq.
Ronna L. DeLoe is a freelance writer and a published author who has written hundreds of legal articles. She does...
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Assignment of lease
An assignment of lease occurs when a tenant wishes to transfer a commercial lease to another party before the end of the lease term., information about lease assignments.
This is usually because the tenant is selling their business, or the tenant wishes to exit the lease and has found another party who will take on the already existing lease instead of entering into a new lease with the landlord.
Before a lease can be assigned, the existing lease document must be examined to identify if the lease is able to be assigned and the conditions under which the landlord will give their consent for the assignment to take place. Commercial leases often include a clause stating that the landlord cannot ‘unreasonably withhold’ consent for the assignment to occur. After this examination has occurred, the assignee (the new tenant) will contact the landlord and provide their financial information.
Generally, a commercial lease will contain a provision relating to the notice required to be given to the landlord when assigning the lease. If this notice is not given, or the existing tenant does not seek the consent of the landlord, the existing tenant may be in breach of their lease and it may be terminated.
When selling a business, an assignment of lease can be beneficial as it allows for continuity of the business premises and reduces fit-out costs. In addition, the business will stay recognisable to customers even if the management has changed.
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Commercial leases – Responsibility for repairs and maintenance A commercial lease is a legally binding contract that gives a tenant certain rights over a property for a set period of time subject to the terms and conditions set out in the lease. A commercial lease is used when leasing property...
Understanding a Commercial Lease
Understanding a Commercial Lease When renting business related property, it is important for both landlords and tenants to understand the relationship they are entering into and the rights and obligations that they each have, the document that governs this relationship is usually a commercial lease. So, what is a Commercial...