Draft Airtight Assignment Clause for Office Building Space

If your lease’s assignment clause is like most, it requires the tenant to get your written consent before it may assign its lease. But unless that consent includes certain conditions, you risk giving the tenant too broad a right and being forced later to rent space to a tenant that isn’t appropriate for your office building, despite the fact that you’ve spent time vetting other tenants to create the right mix at the property. You can avoid this pitfall by clearly specifying the conditions under which you’ll agree to the assignment. Like our Model Lease Clause: Set Conditions for Assignment of Office Space, your assignment clause should be restrictive enough to protect your interests but also fair to the tenant.

Make Consent ‘Reasonable’

“I’ve become very protective when it comes to negotiating assignments and sublets,” says New York City attorney A. Barry Levine. “An owner knows who it’s bargaining with when negotiating a lease, but it should be very leery about who its tenant may be in the future if there’s an easy path to an assignment,” he warns. Most tenants understand that hesitation, but they’ll still want you to be reasonable when determining whether you’ll consent to a proposed assignment.

“‘Reasonableness’ means different things to different people, so owners should go into detail as to what is reasonable and what isn’t when drafting the lease,” says Levine. Specify in the lease that “consent will not be unreasonably withheld,” but be prepared to explain what items are unreasonable—for example, a change of use.

Levine’s concern is that if the owner doesn’t state what’s reasonable and unreasonable, a judge will have to make that decision later if there’s a lawsuit.

Set ‘Reasonable’ Conditions

These are commonly included, “reasonable” conditions:

Tenant stays on hook for lease obligations. “A tenant should rarely be released in the event of an assignment,” says Levine. The tenant should stay liable because, after all, it’s producing the assignee that you’ll look to for rent and it should have to stand behind that assignee, he points out. If you can’t get rent from the assignee, you’ll be able to turn to the tenant if you haven’t released it.

The lease should also say that the tenant is still responsible for its other lease obligations and liabilities after the assignment takes effect. Otherwise, the tenant could argue that your consent to the assignment released it from its obligations and liabilities [Clause, pars. 1, 6, and 7].

Tenant provides key documentation. The owner should get copies of important documents, including all financial reports of the assignee [Clause, par. 2]. It should also get a fully executed copy of the assignment agreement delivered within five days following its execution [Clause, par. 3(g)]. In certain instances, you may also want to insist upon an affidavit from the assignor that it’s a true copy of the agreement, says Levine.

Assignee must be creditworthy. The owner can avoid a lot of trouble by insisting that the creditworthiness of a proposed assignee is at a certain level, explains Levine, who requires that the new tenant have a balance sheet at least equal to the tenant’s balance sheet at the time it entered into the lease [Clause, par. 2(a)].

Use must stay the same. “The use, of course, can’t change,” says Levine [Clause, par. 2(b)]. In addition to the assignment clause, he also tries to be specific in the use clause. But you should also specify that the use of the assignee can’t be at odds with the character of the building or increase the wear and tear to the property [Clause, par. 2(c)]. He recommends not simply saying that the space is for “office use,” but rather saying an office use for a specific type of business or businesses—for example, law offices or a bank. That’s because not all businesses that use office space as part of their operations will be appropriate for your building.  

Practical Pointer: The assignment clause isn’t the only part of the lease that you can use to head off problems. Careful owners may also draft their use clauses to help them with issues that can arise with an assignment. For example, a tenant in a quiet office building that assigns its lease to a company with 100 employees coming and going everyday would create wear and tear in the building and parking lot that wasn’t contemplated by the owner. A savvy owner would mention traffic in the assignment clause and put an occupancy limit on the use clause to specify that an assignee may have “no more than X number of employees at any time,” suggests Levine.

Existing tenants not eligible. Specify that you won’t consent to an assignment to an existing tenant of the building, says Levine [Clause, par. 2(d)]. And make sure that the tenant can’t assign its space to any party that you’re actively negotiating with for space in the building or any tenant in any other building you own.

Rental rate must stay the same. The tenant also shouldn’t be able to charge rent that’s lower than what you’re currently asking for other space in the building [Clause, par. 2(e)].

Tenant must not be in default. At the time the tenant requests your consent to an assignment it mustn’t be in default under the lease [Clause, par. 3(a)].

Assignee must assume lease terms. Say that the assignee “shall assume in writing” all of the terms, covenants, and conditions of the lease that the tenant is required to perform [Clause, par. 3(b)].

Tenant pays costs; owner keeps or shares profits. When it comes to profits that may be realized from an assignment, an owner could offer to share the profits with the tenant, or it could recoup all of the profits [Clause, par. 5]. “I offer to split any profits above the base rent,” says Levine.

In some cases, however, if the market is bad and the tenant has to get out, it may be willing to lose a few dollars per square foot by charging the assignee less than it owes. That’s all on the tenant,” says Levine. Again, the owner shouldn’t lose any money on an assignment; any costs involved in the assignment should be paid by the tenant, including attorney’s fees [Clause, par. 4].

Practical Pointer: Aside from the administrative costs of an assignment, the assignee should pay for increased services. An assignee that wants additional services that the tenant doesn’t require must pay for those services. But this isn’t a reason by itself to deny an otherwise eligible assignee, says Levine. Extra HVAC or weekend lighting fall under the category of things that the assignee will have to agree to pay for itself. These services can also be money makers for owners, so owners shouldn’t be adverse to providing them. 

Security deposit must be adequate. There are two ways to ensure that you have adequate security. First, require that the tenant’s security deposit stays with you. To avoid disputes over what happens to the tenant’s security deposit, say that the tenant waives any right to the deposit and that you’ll keep and apply the deposit in accordance with the lease. Then require an additional security deposit from the assignee.

How should you calculate the amount? If the rent stays the same or the rent goes up and you’ll be sharing the profits with the tenant, then the formula that you used with the tenant would stay the same, usually one, two, or three months’ rent. If the rent goes up, increase the security to match. Keep it consistent, advises Levine [Clause, par. 3(f)].

Tenant is responsible for charges. Say that you may bill, and the tenant must pay, all charges estimated by you to be due through the date of assignment (without relieving the tenant or its assignee of the obligation to pay any balance due when the actual charges are computed) [Clause, par. 3(e)]. 

Separate consent required for alterations, future assignments. Let the parties know that you’re not consenting to anything other than this one assignment. The written consent shouldn’t be treated as a blanket consent to all future assignments and sublets. Rather, you’re reserving your right to withhold consent to any future assignments and sublets by the assignee [Clause, par. 8].

Practical Pointer: Since subletting is usually intertwined with assignment, you should pay attention to two sublet issues. In the case of a sublease, rather than an assignment, the subtenant should agree to the sublease on the same terms as the lease. The sublease agreement should specifically state that each sublease is “subject to all of the terms, covenants, and conditions of the lease” [Clause, par. 3(d)]. And say that in the case of a sublet, the tenant may not sublet less than the entire premises [Clause, 3(g)].

Take Note of Notice Requirements

Once the assignment has been completed, you may at some point have to send notices if there’s an issue with the assignee or there are problems that need to be cured—that is, fixed. Where and to whom should notices be sent?

A copy of the notice should go to the tenant, as assignor; the owner of the building; the assignee; and their attorneys. This increases your work because initially you sent notices to just the tenant and its attorney, and now you must send them to several parties. But it’s better to be safe than sorry by making a couple of extra copies, Levine emphasizes. So remember to require the assignee to give you its contact information so you’ll know where to send notices required by the lease.

Next month: How to Make Sure an Assignment Clause Is Tailored to Your Retail Tenant’s Lease

Insider Source

A. Barry Levine, Esq.: 320 East 23rd Street, New York, NY 10010.