Set 11 Conditions for Consenting to Shopping Center Assignments and Subleases
As retail and restaurant businesses contract and struggle to survive, many shopping center tenants are looking for ways to get out of their leases. One common exit strategy is for tenants to assign their lease interest or sublease some or all of the leased space to a third party. Tenants are generally allowed to do this, as long as the landlord gives consent to the arrangement. Retaining the right to consent to assignments and subleases is crucial, particularly in shopping centers where landlords face the challenge of maintaining optimal tenant mix, maximizing percentage rents, and policing exclusives and other restrictions governing different tenants’ “use” of the space.
However, there are also legal limitations on how landlords exercise their consent rights. In many states (and under most leases), a landlord’s denial of consent to a proposed commercial lease assignment or sublease must be “reasonable.” Of course, like beauty, “reasonableness” is in the eye of the beholder. In the context of landlord rejection of proposed assignments and subleases, the key beholder is the court that may second-guess the decision.
The good news is that you can minimize these risks by establishing clear ground rules for reasonable rejections. Strategy: Require tenants to meet certain conditions for you to even consider assignment and sublease requests, and make failure to do so reasonable grounds for rejecting the arrangement. Here’s how to draft a lease clause to implement this strategy.
SET 11 CONDITIONS FOR CONSIDERING
ASSIGNMENT AND SUBLEASE REQUESTS
Specify that the tenant may assign its interests in the lease or sublease its space with your prior, written consent. While promising that you won’t unreasonably withhold, delay, or condition consent, the lease should also list 11 conditions that the tenant must meet to get your consent.
1. Tenant Must Not Be in Breach or Default
Specify that tenants may only assign or sublease if they’re not in breach or default of the lease, both at the time of the request for consent and the effective date of the proposed arrangement. Use of the word “breach” extends your leverage to the extent that, unlike a “default,” it may encompass any lease violation, including one that doesn’t require notification and the opportunity to cure [Clause, Sec. 1(a)].
2. Tenant Must Provide Key Documentation
Require the tenant to give you key documents relating to the arrangement, including copies of the final, executed assignment or sublease agreement within 10 days of its proposed effective date. This will give you time to vet the agreement and decide whether to approve it.
The tenant should also submit “reasonably detailed information” about the proposed assignee or subtenant’s character, reputation, and business experience along with certified statements, bank references, and other information about its finances [Clause, Sec. 1(b)].
Practical Pointer: You might also want to ask the tenant for an affidavit affirming that what it’s provided is a true copy of the agreement.
3. Sublease Must Be for All of the Leased Space
If the tenant is a small store, consider ensuring that it doesn’t subdivide the space by requiring that the sublease be for the entire and not just a part of the leased premises. Protections against subdividing the space may be unnecessary and unwise if the tenant leases a large portion of the shopping center [Clause, Sec. 1].
4. Lease Terms Govern Assignment or Sublease Agreement
The last thing you want is for the new third party to take over the tenant’s space under totally different lease terms. So, ensure that any assignment or sublease is subject to all the terms and conditions of the underlying lease. In the case of an assignment, the agreement should require the assignee “to assume” all of the tenant’s obligations under the lease so you can hold it liable for any violations it commits once the assignment takes effect [Clause, Secs. 1(c) and (d)].
5. You Can Keep Subtenant If Prime Lease Ends Early
Recognize that if the lease ends early due to a default committed by the tenant, the sublease will also come to an early end. Result: You’ll lose the subtenant and have a vacant space on your hands. To prevent this, you can require the subtenant to “attorn” to you, at your option, if the prime tenant’s lease ends before both the lease and sublease are due to expire. Explanation: Attorning to you means the subtenant becomes your tenant, creating a direct relationship governed by the terms of the sublease [Clause, Sec. 1(d)].
6. Use of Premises Must Remain the Same
Specify that the “use” clause from the underlying lease (assuming, of course, that you’re happy with what it currently says) applies to the arrangement and that the agreement must require the assignee or subtenant to use the property for the same purposes [Clause, Sec. 1(c)].
7. Agreement Must Be Subject to Existing Center Tenants’ Exclusives
Sticking with the underlying-lease-terms-govern theme, be clear that any assignment or sublease agreement is subject to, and the assignee or subtenant must comply with, the exclusive use and other applicable lease rights of other tenants in the shopping center [Clause, Sec. 1(f)].
8. Tenant Must Pay You Fee to Process Assignment/Sublease Request
Processing requests for assignments and subleases can cost you time and money, especially if you hire an attorney to review the proposed agreement. So, consider requiring tenants to pay a processing fee. In addition to compensating you for your costs, fees may discourage tenants from wasting your time with what’s-the-harm-in-trying arrangements that they think you’re likely to reject [Clause, Sec. 1(e)].
9. You Can Require Tenant to Post Additional Security
Chances are, you won’t have as much confidence in the proposed assignee/subtenant’s finances as you did with the prime tenant that signed the underlying lease. That’s why you should reserve the right to require a larger security deposit or other form of extra security as a condition of consenting to the assignment or sublease. If the tenant objects, you can compromise by establishing limitations or a formula for calculating extra security, for example, to a specified percentage or multiplier of the base rent or original security deposit [Clause, Sec. 1(h)].
10. Tenant Can’t Compete Against You for Potential Tenants
Guard against the possibility that the tenant’s efforts to line up assignees or subtenants will directly compete with your own tenant recruitment and marketing activities by banning tenants from assigning or subleasing shopping center space:
- For less than what you’re currently charging for comparable space; and
- To anyone currently leasing space in the center.
Strong tenants may push back on this demand. Potential compromise: Let the tenant ask for a lower rate than on comparable center spaces as long as it doesn’t, or allow anyone else to, advertise it at that rate [Clause, Secs. 1(f) and (g)].
11. Landlord’s Lender Must Approve Assignment/Sublease
Be sure to account for your lenders and their potential right to approve any proposed assignment or sublease of the space. Explanation: Many landlords with mortgages on their shopping centers have signed “collateral assignments of leases and rents” giving their lenders certain rights in leases for space at the center. Such collateral assignments may bar the landlord from consenting to an assignment or sublease without the lender’s prior approval [Clause, Sec. 1(i)].
Establish Substantive Grounds for Reasonable Denial
Meeting all 11 of the above conditions is just the first part of the consent process, the gateway through which a tenant must pass for you to even consider an assignment or sublease request on its substantive merits. You should still be allowed to reject the proposed arrangement if it doesn’t meet your reasonable standards. The lease should clarify this and explain what your reasonable standards are. Specifically, it should get the tenant’s acknowledgement that it wouldn’t be unreasonable for you to reject a proposed assignee or subtenant that:
- You don’t believe will be able to generate sufficient percentage rent;
- You don’t believe will fit your shopping center’s tenant mix and character; or
- Will use the space to engage in certain forbidden uses, such as governmental or quasi-governmental functions.
While tenants may accept these terms in principle, they probably won’t want to give you broad discretion to decide how much percentage rent a proposed assignee/subtenant will generate or whether it will fit your tenant mix. Rather than a subjective opinion, they’ll likely insist that you establish and apply clear and objective criteria for making such determinations [Clause, Sec. 2].
Keep in mind that consent is just one of the leasing issues that comes into play with assignments and subleases. Examples of other things you need to look after in these situations include:
- Ensuring the tenant remains responsible for lease obligations after an assignment (which, unlike a sublease, involves some degree of discharge from lease duties);
- What happens if the underlying lease is terminated early via default or bankruptcy; and
- Whether to insist on a cut of the tenant’s profits, if any, from the assignment or sublease.
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