Leasing Illustrated
August 2012
Issue #7

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One of the most important aspects of an assignment/subletting provision in a lease is to make sure that the tenant retains sufficient flexibility to complete business transactions without interference from its landlord. Not surprisingly, many landlords' initial drafts do not permit the necessary flexibility; but what is surprising is that some tenants fail to address this concern in the final negotiated lease.

Avoid this pitfall by covering the nine essential areas of assignment/subletting flexibility suggested in this month's newsletter.

Alan Katz
Mintz & Gold LLP 


The Lease Legacy


Talented, resourceful, lethal, intelligent, buff; he walks into a new situation and, with his years of training, instinctively plots exit strategies in case of changed circumstances.

Yes, I could be talking about your typical commercial leasing lawyer, but I was actually thinking about the Jason Bourne character from the Robert Ludlum novels and Universal Studios action/spy thriller film series.

I love the Bourne series and admit to compulsively getting drawn in whenever coming upon the movies while channel surfing. I am also looking forward to the new movie, The Bourne Legacy, slated to come out this summer. Not that I ever understand the plot, but the films are fun and fast moving, and who can object to a little gratuitous violence?

Other than being fun and fast moving with gratuitous violence, how does this relate to leasing?

Well, in structuring its lease a tenant also needs to focus on having the necessary flexibility to adapt to changed circumstances.

Inevitably, a tenant's space needs are going to evolve over a ten or fifteen year term. The exit strategies necessary to provide sufficient flexibility over such an extended period of time cover a broad range of lease provisions, including expansion rights, rights of first offer, termination options and assignment and subletting.

These topics are too broad to cover in one newsletter, so today we focus on one critical aspect: the necessary flexibility for a tenant to complete major transactions, including the sale, merger or reorganization of its business, without undue interference from the landlord.

Landlords do have legitimate reasons to restrict the rights of tenants to assign and sublease and most leases include either a general prohibition or significant restrictions on such rights. These restrictions typically also prevent transfers of the equity interests in the tenant that are intended to circumvent the assignment and subleasing provisions of the lease.

That being said, tenants must have the flexibility to pursue legitimate business transactions without landlord's consent. Otherwise, a landlord can extort unreasonable and costly concessions from a tenant as a condition to providing its consent to critical transactions not directly related to the lease.

A nightmare scenario for a tenant (not to mention its attorney!) is to have negotiated its merger, sale or reorganization agreement, or perhaps even executed the formal agreement, only to discover that one or more of its leases would be in default and subject to termination because of the transaction.

To make sure that you sleep soundly, cover the following nine points in your assignment/subletting provision:
  • You should be entitled, without the consent of the landlord, to transfer to an entity created by merger, reorganization or recapitalization of your entity or a purchaser of all or substantially all of your assets or stock, provided the successor entity assumes your obligations under the lease, the transfer is for a valid business purpose (i.e., not principally to transfer the lease) and the resulting entity has reasonably sufficient financial viability.

    Be sure to work with your real estate professionals (attorneys, brokers, consultants) to structure the provision in a manner that works for your business. Mom and pop shops, partnerships, public corporations and start-up companies all will have different needs for flexibility.
  • Transfers to or use of the premises by an affiliated entity should also be allowed under the same standards as in the bullet point above, except that no financial viability test should be required since your original entity remains viable. Affiliates are entities controlled by, controlling or under common control with you and "control" should be defined broadly to mean the power to direct the business and affairs of the entity in question.
  • Specifically permit intercompany transfers among equity holders, interfamily transfers without landlord's consent and new equity interests. The reallocation of ownership interests in your entity and transfers for estate planning purposes should not trigger the need for the landlord's consent. Neither should the admission of new holders of ownership interests.
  • The lease should permit corporate transactions in public markets. The lease should allow the transfer of your shares (by persons other than those deemed "insiders" under SEC rules) if such sale is effected through the "over-the-counter market" or any recognized stock exchange (including a public offering).
  • If you are a partnership (e.g., law firm, accounting firm) be sure to permit the admission, withdrawal, removal, incompetency, death and retirement of partners without landlord's consent, since without a specific provision these transactions are often defined as "assignments" under typical lease clauses.
  • Certain retail uses, in particular restaurants or nightclubs, can be tricky since some landlords consider the location as part of your business and look to get a piece of the action on a sale. This should be resisted to the extent possible, but if unavoidable provide the landlord with a specific and limited "vig" without any consent rights.
  • Determine the surviving entity's financial strength with an objective test. Many leases provide that the net worth of the surviving entity must be the greater of the tenant's net worth immediately prior to such transaction or its net worth on the date of the lease. Try to limit this test to your net worth immediately prior to the transaction since it is the most relevant value.

    If your entity has a high net worth that far exceeds what is needed to pay the rent, net worth may not be the appropriate standard. Again, structure with your particular entity in mind since other valuation methods may be more appropriate, such as EBITDA, your corporate rating or some multiple of the rent.
  • In addition to not requiring landlord's consent, make sure that other inapplicable assignment/sublet provisions do not apply. For example, landlord should have no right to recapture and net "profits" should not be split.
  • Make sure that these same provisions would apply to a similar transaction by your subtenant (or sub-subtenant, if possible). This will make it easier to complete a sublease of the space down the road, without having to ask the landlord for this flexibility as part of its consent to the sublease.
Completing a major business transaction can be stressful enough. Channel your inner Bourne and address these points in your assignment/subletting clause so that the leasing portion of the transaction does not itself become too much of an action thriller.

Featured Transaction


Mintz & Gold recently represented WeWork LLC in connection with two transactions; the lease of the entire ninth and tenth floors at 261 Madison Avenue and the net lease of the entire building at 54 West 40th Street. WeWork is a rapidly growing community and the leading provider of collaborative workspaces for entrepreneurs, freelancers, and small businesses. WeWork supports small businesses by creating collaborative, service-based work environments. Members have access to uniquely designed workspaces, conference and social areas, networking and educational events, a virtual discovery platform, health insurance, and much more. Since inception in 2010, the WeWork community has grown to nine buildings and more than 3,000 members in New York City, San Francisco, and Los Angeles.

About Us


Mintz & Gold prides itself on providing the highest quality legal representation often associated with large law firms with the attention and reasonable costs of a smaller law firm.  Mintz & Gold's Real Estate Department has a national practice specializing in a broad range of commercial real estate law, with a particular focus on commercial leasing. We have extensive experience with respect to office, retail and shopping center leasing, and have represented major Manhattan landlords, national and multinational institutional tenants and national retail chains. Most of our attorneys practiced for many years at large institutional law firms before joining Mintz & Gold.

For more information regarding Mintz & Gold's real estate practice, click here.

For a list of representative transactions of Mintz & Gold's real estate group, click here.

For Mintz & Gold's website, click here.

Alan Katz
Telephone: (212) 696-4848
Fax: (212) 696-1231

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This newsletter has been prepared for general information purposes only, and is provided with the understanding and subject to the user's agreement that it does not constitute the rendering of legal advice or other professional advice by Mintz & Gold LLP, and does not create any attorney-client or other special relationship. The content of this newsletter may be considered advertising under the ethical rules of certain jurisdictions and prior results do not guarantee a similar outcome. You should not rely upon this newsletter without seeking legal advice from an attorney licensed in the relevant jurisdiction(s). THE CONTENT OF THIS NEWSLETTER IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. Additionally, the information contained in this newsletter does not constitute tax advice. Any discussion of tax matters contained in this newsletter is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter.

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