Charge Tenants a Fee for Processing Their Assignment & Sublease Requests
If tenants don’t have to pay fees, they’re more apt to flood you with requests.
In these uncertain times, tenants are increasingly reluctant to lock themselves into long-term leases. Assignment and sublease rights may alleviate these concerns and give tenants added flexibility. However, they can also be a burden for landlords. For one thing, processing assignment and sublease requests takes significant time and administrative effort. It seems only reasonable that landlords should seek to pass along at least some of their processing costs to tenants.
That’s why you should include a lease clause that requires tenants to pay a non-refundable fee for each assignment or sublease they request. While the amount of the fee is subject to negotiation, it should be high enough to both cover your administrative and legal expenses and discourage tenants from making frivolous or superfluous requests that they know you won’t approve. We’ll give you a Model Lease Clause: Require Non-Refundable Fee to Process Assignment or Sublease Requests, that you can adapt and use in your leases.
Fee Compensates Landlord’s Actual Costs
During lease negotiations, tenants may object to these fees. Remind them of the extensive materials you must review when deciding whether to give consent to an assignment or sublease request. You need to evaluate the proposed assignee/sublessee’s financial records, credit history, business model, and reputation. Then you have to consider all of the different improvements the new tenant will need, which may involve detailed consultations with architects, electricians, plumbers, and other contractors and vendors. If the candidate is still viable at this point, you’ll have to talk to your attorney and review the assignment and sublease documents to identify what in the current lease you need to change to ensure proper legal protection. Then you have to negotiate and finalize those lease changes with all the parties involved.
There’s really no way to avoid these costs and hassles. Commercial leases typically give landlords the right not to consent to assignments or subleases but also spell out that such consent must not be unreasonably withheld. Carrying out due diligence is part of what landlords must do to demonstrate that they acted reasonably in denying consent. It’s basically a landlord’s cost of doing business.
Processing Fee Motivates Tenants to Pre-Screen
The non-refundable fee not only compensates you for your expenses but also incentivizes the tenant to pre-screen its prospective assignees or sublessee’s before presenting them to you. Tenants won’t want to lay out the fee if they know the prospect has little chance of winning the landlord’s acceptance. The fee thus spreads the risks and gives tenants a financial interest in the outcome of the vetting process.
By contrast, if tenants don’t have to pay fees, they’re more apt to flood you with assignment and sublease requests. Some ill-faithed tenants might even exploit this advantage as a harassment tactic, submitting dozens of requests in the hope that you’ll eventually feel like you have to accept one of the proposed assignees or sublessees just to put the stream of requests to an end.
How to Draft Non-Refundable Processing Fee Clause
Having established justification for charging the fee, you need to ensure you incorporate the appropriate language into your lease. Like our Model Lease Clause, your clause should make it clear that the fee is:
- Compensation for your administrative, legal, and other costs in processing assignment and sublease requests;
- Non-refundable, meaning the tenant must pay it regardless of the ultimate decision you make on the request;
- Payable for each assignment or sublease request the tenant makes and that you need not process the request if the tenant doesn’t make the accompanying payment [Clause, par. a].
If a tenant with significant negotiating leverage flatly refuses to accept the fees clause, you don’t have to ditch the idea completely. Compromises you can propose include:
Reduced fee: First, explore the possibility of reducing the fee amount. The key is to hold the line on a certain amount that you determine is the minimum necessary to fairly cover your costs and disincentivize frivolous requests from the tenant.
Partial refund: An alternative approach is to maintain the fee amount but agree to make a stated portion of the fee—such as 25 percent—refundable if you end up giving your consent to the particular assignment or sublease request. However, specify that you will pay the refund only after the effective date of the assignment or sublease, provided that the assignee or sublessee actually opens for business [Clause, par. c]. Better yet, postpone payment of the refund until after the assignee or sublessee pays three full months of rent. By that time, you should be satisfied that the assignee or sublessee is desirable and responsible.
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