The Bogie and Bacall of Leasing
There are many classic combinations that go together so well. Peanut butter and jelly. Mintz and Gold. Bugs and Daffy.
And yes, Matt Harvey and Zack Wheeler (c’mon, even Mets fans can dream!).
In leasing, we have assignment and subletting, and we often talk of them together in the same breath. The two subjects are handled in the same lease sections and you seldom hear of one without the other.
Yet, for all the negotiation and all the drafting about assignments, it seldom happens.
There are many examples of things we talk about or see in movies that do not often happen in real life.
When 25 storm troopers shoot at Hans Solo with their blaster weapons, he gets away with just a grazing and some torn clothes. Not likely. James Bond, when confronted with a group of attackers, instead of being overwhelmed all at once is approached one at a time so he can easily defeat them. Never happens (with the notable exception of Austin Powers). The Knicks get past the second round of the playoffs. Perhaps least likely of all.
The same thing is true with assignments. They do not often happen in real life. Why is that?
The primary reason is that under almost every lease, whether a tenant assigns its lease or sublets its leased premises, the tenant remains liable for its obligations under the lease.
That being the case, it makes more sense for the tenant to sublease its leased premises since if the sublessee defaults, the tenant has available remedies against the defaulting sublessee, including taking back the space. An assignor has no such remedies against the assignee.
Recently, we had occasion to represent a corporate tenant spinning off some of its businesses into a new entity. The original tenant wished to assign various spaces which were intended to be occupied by divisions of the new entity. The assignment made sense only because the tenant intended to negotiate a release of liability with its landlord(s).
Grizzled real estate attorney veterans all, the Mintz & Gold crew looked at each other a bit confused, since over many years of practice we seldom had occasion to negotiate a true arms-length assignment (as opposed to a simple blanket assignment of many properties in a sale of a company).
We put our heads together and came up with the following six issues to contemplate both in a lease and with an assignment of lease:
- Cover the same issues in your lease for an assignment as with a sublease. This should not be difficult because the lease form likely treats them similarly in terms of conditions and procedures. But since this is not always the case, be sure that assignments and subleases are both covered in terms of all rights of the tenant under your lease, such as consent, carve outs for affiliates/sales, etc., and for assignments in particular, you should be sure that the fair market value of any tenant improvements is excluded from the sharing of “profits”.
- Consider the form of assignment. The form should look very similar to the blanket assignment discussed above; short, simple and straightforward (yes, I know, three things that seldom go together when lawyers are involved).
○ The assignee will request representations from the assignor. Subject to concerns specific to the deal, you should limit your representations as assignor as much as possible (i.e., that the lease is still in full force and effect, that you have the right to assign, etc.)
○ Many assignments will provide for a mutual indemnity, with the assignor indemnifying the assignee for matters arising prior to the date of assignment and the assignee indemnifying the assignor for matters arising from and after the date of assignment.
- Release from Liability. As a general rule, an assignor remains liable for defaults by the assignee. In order to make an assignment feasible, you should try to mitigate your long term exposure and negotiate in your lease the right to a release if the assignee meets certain financial and other (e.g., character, reputation, experience) prerequisites. This is very hard to get and most landlords will want both assignor and assignee to remain liable absent some other (likely financial) incentive, although you will have more success negotiating for this right up front during lease negotiations than later on when you want to assign. Without a release, a sublease would make more sense as indicated above.
- Release of Guaranty. If your lease was guaranteed, whether through a guaranty of payment and performance or “good guy” guaranty, you should also try to mitigate the guarantor’s long term exposure and obtain a release of the guarantor. Again, this is difficult to obtain (although particularly equitable in the case of a good guy guaranty, since presumably once the lease is assigned the guarantor can no longer ensure that the tenant vacates the premises) and better negotiated during the lease negotiations.
- Assignment of Security Deposit. You will want the right to assign the security deposit under your lease to the assignee. Include this right under your lease, and if the security is held as a letter of credit, provide that the landlord will cooperate in making such transfer or in obtaining a new letter of credit, so that two letters of credit are not outstanding at the same time.
- Limitations if Liability Remains. If you cannot obtain a release, you should request notice and cure rights if the assignee defaults (and the right to a new lease) and provide in the Lease that your liability cannot be increased based on modifications or amendments to the Lease between Landlord and the assignee. Of course, at that point, you are edging closer and closer to a sublease and are probably better off with a sublease.
A great baseball trivia question is to name the most prolific brother home run combination. The answer: Henry and Tommie Aaron. Henry had 755, Tommie had 13. But Tommie had to be ready to round the bases in the rare instances when he hit one out, and you too should be prepared in those rare instances when an assignment makes sense.