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What is Assignment of Lease and How It Differs from Subletting

The assignment of lease (and rent) is a foggy topic that is often confused with subletting. Let's clear the air once and all right now. Learn the differences between a lease assignment and sublease so you can make the right choice.

What is Assignment of Lease? - The Important Basics

Let's begin by introducing the 3 players in a lease assignment - The landlord, the original tenant (assignor) and the new tenant (assignee). The original tenant has an unexpired lease agreement with the landlord and he wants out. Since the original tenant can't just break the agreement and walk off, what he does is to get a new tenant to swap places... and take over all his rights and obligations for the remainder of the lease period. So if the original tenant signs a 1 year commercial lease and the business goes bust after 8 months, the new tenant will be assigned a 4-month commercial lease (with the same terms and conditions as the original agreement). Now here's the big catch: Even though the original tenant has handed over all his duties and obligations to the new tenant, he is not off the hook... unless the landlord agrees to release him from all liabilities. If the new tenant stirs up trouble, our dear original tenant will find himself in hot soup as well. Of course, whether the original tenant is allowed to pull this assignment trick out of his hat is a whole new matter. Knowing for sure is actually simpler than most people think: First, examine your local landlord tenant laws for any lease assignment rules. Most of the time, landlords are given the right to allow or disallow assignments but once in a while, the local law let tenants have the final say instead. If there's no mention of lease assignments in your law text, then your rental lease agreement shall dictate the terms.

Difference Between Lease Assignment and Subletting

When it comes to subletting vs assignment of lease, there's often a massive mix-up. Sometimes even real estate professional get it wrong by assuming them to be one and same thing. However if you dig deeper, you will find that the differences are not just numerous, but important as well. Let's begin by dragging the landlord into the picture. An assignment of lease launches the new tenant into a direct relationship with the landlord - The landlord collects rent straight from the new tenant and deals with the new tenant directly on all lease issues. So in this case, the original tenant gets to take back seat and doesn't have to manage the new tenant actively. On the other hand, there's no direct relationship between the landlord and new tenant (subtenant) in a sublease. Instead the original tenant plays mother goose and is responsible for collecting rent from the subtenant and making sure that he's following the lease rules. When you compare the two, a sublease is a lot more hands-on for the original tenant. No matter which path you take, you will still want a good new tenant who pays the rent on time and follows the lease rules to the agreement. For the golden rules on screening tenants and running credit checks, Click here for our guide to running tenant credit checks. When you have a lease assignment, the terms and conditions of the lease remains largely unchanged - It's almost like taking the original lease agreement and swapping the tenant's name with another. With a sublease, there's more breathing space - The original tenant can decide how much rent to charge, how long the subtenant is going to stay or even collect security deposit... as long as it stays within the boundaries drawn by the original lease agreement between the landlord and original tenant.

Should You Choose Assignment of Lease or Sublease?

You are the Landlord - A lease assignment is recommended in most cases. You will have more control over your new tenant (instead of leaving matters in the original tenant's hands and hoping that he would do a good job)... plus you still have the original tenant to cover your back in case anything goes wrong. You are the Original Tenant - Now this is a tricky one. If you want to someone to take over the entire lease and property for its remaining duration (e.g. your business goes belly-up and you no longer need the office), then help yourself to a lease assignment. If the landlord's consent is required for assignment (and he doesn't give the nod), you can always try offering him a lease assignment fee as a deal sweetener. However, if you are looking for someone to share the place (and rent)... or perhaps you need someone to cover the rent while you are overseas for a few short months, then a sublease would be ideal. You are the New Tenant - An assignment of lease works better for you most of the time. You won't be at the mercy of the original tenant (for example if he screws up and the landlord terminates the original lease agreement, your sublease might also go up in flames). But if you only want to rent part of the property... or don't want to tie yourself down for the remaining lease duration, then you are better off sticking to a sublease. Now that we have covered the topic of assignment vs sublease, go ahead and take your pick - Click here for an assignment of lease form or Click here for a sublet agreement instead.

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Navigating the assignment of a commercial lease

Special circumstances can require a tenant or a landlord to assign a commercial lease. Find out the most common situations for a commercial lease assignment and whether it's right for your situation.

Find out more about real estate and business

by   Ronna L. DeLoe, Esq.

Ronna L. DeLoe is a freelance writer and a published author who has written hundreds of legal articles. She does...

Read more...

Updated on: January 9, 2024 · 3 min read

• Tenant's assignment of a commercial lease
• Getting the landlord's consent
• Contents of a tenant's assignment agreement
• Landlord's assignment of a commercial lease

If you're running a business, you may find yourself in a situation where you need to break a commercial lease. As a tenant, one option is to assign the lease, which means removing yourself completely from the lease and transferring it to a third party.

There are also instances when a landlord may need to assign a commercial lease, such as when a property is sold. In doing so, you sell the building with any leases intact, which requires assigning your right to collect rent to the new owner.

Tenant's assignment of a commercial lease

There are many reasons a tenant may want to get out of a commercial lease, including not being able to afford the rent and needing less or more space. Because it's unlikely a landlord will simply let you walk away from your commitment, you should check what your lease says about early termination. Most commercial leases require the tenant to pay rent for the rest of the term and possibly additional fees for breaking the lease.

Assignment of the lease is another alternative to breaking it. In doing so, you give the new tenant, known as the assignee, the right to occupy the premises in your place for the remainder of your lease term.

Getting the landlord's consent

Almost all assignments of commercial leases by the tenant need the landlord's consent, so check your original lease for any such language. As with a residential lease, a landlord cannot unreasonably withhold consent for you to assign the lease. However, it's up to you as the assignor, or original tenant, to ensure that your assignee is reliable, responsible, and can pay the rent—or you may end up being held financially liable.

If the tenant assigns a commercial lease to a new tenant without the landlord's permission, the landlord can sue the original tenant for breaking the lease. The landlord can also collect damages against one or both tenants if he can show that the assignee isn't a good-paying tenant or doesn't have the type of business he wants in the building. He can also end the lease and evict the new tenant.

Contents of a tenant's assignment agreement

Assignment of a commercial lease is almost always accompanied by a written agreement to preserve both the tenant's and landlord's rights. Some states require written assignment agreements . Many commercial assignment agreements contain provisions for the:

• Payment of fees to the landlord for having another business substitute for yours
• Assignor's and assignee's names, addresses, and business names
• Landlord's name, address, and business name
• Amount of the new tenant's rent and the dates for payment
• Date of the agreement
• Date the assignment is effective
• Date the lease ends
• The landlord's, assignor's, and assignee's signatures

Assignment agreements usually don't contain a provision releasing the assignor from paying rent, meaning that you, as the assignor, are held responsible for payment. Even so, assignment can be a financially responsible option for a tenant who's going out of business or who needs new space immediately.

Landlord's assignment of a commercial lease

Sometimes a commercial landlord needs to sell his property. After the new owner, or assignee-buyer, buys the property subject to existing leases, the assignor-landlord assigns the leases to the new owner, who can then collect rent. The assignor-landlord notifies tenants by sending a notice of sale, a notice of assignment of lease, or a notification on letterhead listing the assignee-buyer's address for payment of rent.

Unless the lease states otherwise, you, as landlord, can sell your property to anyone, but make sure to get a hold harmless clause , also known as an indemnity clause, in your contract of sale. Such clauses protect you from liability to the tenant if the buyer doesn't perform her duties as a landlord. Otherwise, as the original landlord, you're still liable for your obligations to the tenant, such as keeping the premises habitable.

Under the right circumstances, assignment of a commercial lease can work for both landlords and tenants. If you need assistance with your assignment agreement, consider using an online service provider to prepare it for you.

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Demystifying Assignment of Lease: Your Go-To Guide

LegalGPS : July 29, 2023 at 8:17 AM

When you’re talking about property leasing, it’s important to understand that there are a lot of terms and concepts that you may have never heard before. One of them is the assignment of lease, which refers to a situation where a tenant transfers their rights and responsibilities under the lease agreement to another party.

What is an Assignment of Lease, and why is it so crucial?

An Assignment of Lease is a term you may have heard thrown around, especially if you're involved in rental properties. It’s a pretty important document. But what exactly is it? Well, in simple terms, an Assignment of Lease is an agreement where the original tenant of a property transfers their leases and all of its rights and obligations to a new tenant. Now, you might be wondering, "When would this scenario ever occur?"

Let's imagine you're a tenant who signed a three-year lease for an office space. However, two years in, you need to relocate due to unprecedented growth of your business. Instead of breaking the lease, you might choose to assign your lease to another business looking for office space. This means that you, as the original tenant, no longer have any obligations under the lease. The new tenant is now responsible for paying rent and complying with all of the terms of the previously signed agreement.

Now that you understand, let's get into the step-to-step guide on how to create an Assignment of Lease!

Steps to Write an Assignment of Lease

Creating a thorough Assignment of Lease agreement doesn't need to be an overwhelming task. Simply follow these steps to ensure your agreement is both comprehensive and legally binding:

Step 1: Identify the Parties

The information of each party should be included. For the existing tenant (the assignor), make sure to include:

Full legal name or business name

Postal mailing address

Phone number and email address

Do the same for the new tenant (the assignee). Make sure all the information is up-to-date and accurate to avoid any unnecessary confusion or disputes. For example, if the assignor is a business, make sure they have updated their mailing address with the post office to reflect their new building location. If a party has multiple addresses, be sure to list them all.

Step 2: Specify the Lease

This section requires exact information from the original lease agreement, including:

Property address and description

Lease start and end date

A reference to the original lease agreement (for instance, a sentence like "the lease agreement dated...")

Remember to include a copy of the original lease as an attachment to ensure the assignee understands the terms they're adhering to. If not already included in the original lease agreement, be sure to add the following information: Description of rental property, Lease term (how long the lease is good for), Rent amount, and Security deposit amount.

Step 3: Detail the Assignment

State that the assignor is transferring all their interests and obligations in the lease to the assignee. Here, write something like:

"The Assignor hereby assigns, transfers, and conveys to the Assignee all of the Assignor's rights, title, and interest in and to the Lease, together with all the Assignor's obligations, liabilities, and duties under the Lease."

This means that the assignor is transferring all of their interests and obligations in the lease to the assignee. This includes any future rent payments, repairs and maintenance responsibilities, notices of default by either party, and so on.

Step 4: Landlord's Consent

Many leases require the landlord's consent to assign the lease. The assignor should request written consent from the landlord and include a clause like:

"The assignment of the lease is not valid unless and until the landlord provides written consent."

This is followed by a place for the landlord to affirm consent by signing or initialing. This is important because the landlord can elect to withhold consent and the assignment will not be valid. If this is the case, you may need to provide additional consideration for your landlord's assent (for example, an increase in rent).

Step 5: Assignee Acceptance

Include a statement in which the new tenant agrees to the assignment and the terms of the lease. It may look like:

"The Assignee hereby accepts this assignment, assumes all duties and responsibilities under the Lease, and agrees to perform all of the Assignor's obligations under the Lease."

You need to do this because the new tenant needs to have an affirmative acceptance of the assignment in order for it to be valid. This is typically done through a letter from the assignee stating that they agree to perform all of your obligations under the lease.

Step 6: Signature and Date

Every binding legal document needs a date and a signature. Make sure that there is a proper place for the assignor and the assignee to sign and print their names, with a line for the date.

By following these clear, actionable steps, you'll be able to construct an effective Assignment of Lease agreement. Remember, every situation is unique, so adjust the template as necessary, being sure to include all relevant details.

Clear so far? Great! Now, let's focus on the tips to draft a perfect Assignment of Lease.

Tips to Draft a Perfect Assignment of Lease

Accurate Dates: Be sure to include the date when this agreement will take effect. Precision avoids any confusion about durations, when the assignee takes over, or when the assignor's obligations end.

Clear Terms: This document should restate the terms of the original lease. The assignee needs a clear understanding of what they're stepping into. Bit ambiguous? Think of it like this: the assignee should be able to step into the assignor's shoes comfortably.

Specify Rent Terms: Stating the rent amount, due dates, and method of payment in the assignment helps create a record of the agreed-upon rent terms, ensuring no misunderstanding arises in the future.

Specify the Term: The assignment should state how long the new lease lasts. For example, if the original lease is for one year, then the assignee will assume only a one-year term.

Specify Other Conditions: If there are other conditions in place—such as tenant improvements or utility allowances—then specify these too.

An assignment of lease doesn't have to be a formidable task to overcome. With a cautious and considered approach, these documents can be a smooth and seamless part of managing a successful lease transition.

Our contract templates can offer you even more support, empowering you towards crafting an excellent and individualised Assignment of Lease ready for your task. So why not take your next step towards leasing success and check them out today? Click here to get started!

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What is a Lease Assignment?

A lease assignment is when your landlord legally transfers your interest in an apartment lease over to another tenant who will live there in your place..

A lease assignment, often called a lease takeover or a lease transfer, is the legal term for when your landlord allows you to pass responsibility for your apartment to another tenant. The new tenant, your assignee, becomes the tenant under the lease agreement instead of you. They pay the rent directly to the landlord and are treated as the tenant in every other way.

The catch with lease assignments is that you aren't always completely released from liability under the lease, so if the assignee defaults then the landlord might come after you for that rent. If the lease is joint and several (which most residential leases are) then they could also come after you for the rent if one of the other tenants on the lease were to default.

In general you will need the consent of everyone involved in the assignment in order to pull off a lease assignment: the landlord, you and your assignee. Your master lease or the assignment agreement that your landlord suggests might also require the approval of any cotenants, so look out for that.

Once you've found the right tenant to assign your lease to you can draw up an assignment agreement and ask your landlord and the new tenant to sign it.

The information provided on this website does not, and is not intended to, constitute legal advice.

What Is a Commercial Lease Assignment?

A commercial lease assignment happens when a tenant transfers all of the rights to a lease to someone else but remains liable for rent payments to the landlord. 4 min read updated on February 01, 2023

A commercial lease assignment happens when a tenant transfers all of his or her rights to a lease to someone else but remains liable for rent payments to the landlord.

A Tenant's Right to Assign or Sublet a Commercial Lease

Due to difficult financial times, businesses have been forced to downsize.

Often these businesses find themselves in commercial leases for more space than they need. In order to save money, these businesses will consider a commercial lease assignment or subletting the extra space. Both options have pros and cons, but the first step is examining the current lease in order to figure out whether there are any restrictions on assignment or subletting.

Commercial leases are contracts and, as such, are subject to their terms. Thus, the language of the lease will dictate whether or not the tenant is able to assign the lease to someone else or sublet the space.

If a lease doesn't contain any rules against assignment or transfer, then a tenant is allowed to assign or sublet. Unless your lease says otherwise, you do not have to get your landlord's consent to sublet or assign your lease.

Businesses might sublet or assign office or retail space to help with costs or to avoid a penalty if they need to end their commercial lease earlier than their contract stipulates. Sometimes, this may be their only option, regardless of their financial position.

Legal Considerations

When considering your options, you should be aware of the legal differences between assignment and subletting.

There are also several legal and practical aspects to consider when negotiating an assignment or sublease. This includes any legal consequences the tenant may face if the landlord ends the lease.

It is in your best interest to consult an experienced real estate attorney so that you can protect yourself and understand all of your options. Whether you sublet or assign your lease, you will need to find a new tenant. However, there are still differences between the two.

Before subletting or assigning your lease, you should review your lease agreement and talk about your options with your landlord.

It is also important to check your state's laws regarding subleases and assignment because some states require the landlord's consent in order to complete this transfer.

What Happens If I Breach the Lease by Subleasing or Assignment?

Breaching your lease can carry severe consequences, including the following:

• Paying damages to your landlord
• Termination of the lease agreement

What Is an Assignment of Lease?

A lease assignment happens when the tenant transfers all of his or her rights and interest in a lease to another party. Although the new tenant takes on these rights and interests, the assigning tenant is still liable to the landlord.

If the new tenant breaches the lease, the landlord can enforce the terms of the lease on both the new tenant and old tenant. The former, or assigning, tenant is still liable to the landlord according to the original commercial lease agreement.

A lease assignment can also be called:

• A lease transfer
• Assignment agreement
• Assignment of lease
• Lease assignment

Sometimes, a tenant has to leave before their lease is up. In this case, they might be allowed to assign, or transfer, their lease to a new tenant. The old tenant, or assignor, transfers his rights to a new tenant, the assignee.

You can assign both residential and commercial leases. In an assignment, the assignor transfers their lease to a new tenant using a lease assignment agreement. The new tenant then takes the place of the assignor, but the former tenant is still responsible for missed rent checks and damages.

What Does a Lease Assignment Agreement Contain?

A lease assignment agreement is a document that transfers a commercial or residential lease from one party to another. When a tenant needs to break a lease and has a new tenant lined up, they can use a lease assignment agreement.

A lease assignment agreement contains basic information:

• Identifying information
• Assignment start date
• Landlord name

Lease assignment agreements are pretty simple because they reference the original lease. This means that all of the terms in the old lease are automatically included in the new agreement.

A lease assignment agreement transfers the entire lease, whereas sublease agreement does not. Assignments transfer the whole lease from one tenant to another.

The most important thing to know about lease assignment agreements is that they usually need the landlord's permission. If you're considering assigning your lease, you should make absolutely sure that your landlord agrees to the arrangement because you are transferring your lease to a new party.

If you need help with commercial lease assignment, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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The Importance of Lease Assignment Agreements

Understanding Lease Assignment Agreements: A Vital Guide for Franchisees

Running a franchise is no small feat, especially when you’re managing multiple locations. Amidst the hustle of daily operations, financial reporting, marketing strategies, and employee management, the importance of lease agreements can often be overlooked. However, understanding and managing lease assignment agreements is crucial for the long-term success and stability of your franchise business.

Lease assignment agreements are crucial in real estate transactions as they facilitate the transfer of lease rights and obligations from one party to another. For tenants, they offer flexibility by allowing them to exit leases before expiration without penalties, while for landlords, they ensure continuity of rental income and compliance with lease terms.

This article will dive deeper into lease assignment agreements, how they can impact your business, and why you should keep an eye on them.

What is a Lease Assignment Agreement?

A lease assignment agreement is more than just a piece of paper; it is a vital legal document that can significantly impact your business operations and financial health. This agreement comes into play when you need to transfer the lease of one of your locations to another party, perhaps when selling a location or restructuring your business. It ensures that the new tenant assumes all rights and responsibilities associated with the lease, protecting both the franchisee and the landlord from potential legal disputes and financial losses.

For franchisees, particularly those with multiple locations, keeping a close eye on lease assignment agreements is essential. These agreements ensure smooth transitions, whether you are expanding, downsizing, or selling parts of your business. They help maintain operational continuity and safeguard your investments, allowing you to focus on growth and profitability without the looming threat of legal complications or unexpected financial burdens.

A lease assignment agreement is a legal document that transfers the rights and responsibilities of an existing lease from one party (the assignor) to another party (the assignee). This is common in business scenarios where a franchisee, who operates multiple locations, wants to transfer the lease of one of their locations to another party.

Why is a Lease Assignment Agreement Important to Franchisees?

For a franchisee with multiple locations, a lease assignment agreement is crucial for several reasons:

Transferring Responsibilities : When a franchisee decides to sell or transfer ownership of one of their locations, they often need to transfer the lease agreement along with it. The lease assignment agreement outlines the terms of this transfer, including the new tenant’s responsibilities for rent, maintenance, and compliance with lease terms.

Avoiding Breach of Contract : Without a proper lease assignment agreement, attempting to transfer a lease to a new tenant could be a breach of contract with the landlord. This could lead to legal issues, including eviction or financial penalties. The agreement ensures that the transfer is done in accordance with the terms of the original lease.

Protecting Investment : For a franchisee, each location represents a significant investment of time and money. Properly managing lease agreements ensures that this investment is protected, even if the franchisee decides to sell or exit a particular location.

Maintaining Brand Reputation : Franchise businesses rely on maintaining a consistent brand image across all locations. Ensuring that lease agreements are transferred smoothly helps maintain this consistency and avoids disruptions in operations that could harm the franchise’s reputation.

Facilitating Growth or Restructuring : Having clear processes for lease assignments makes it easier for franchisees to expand their business by acquiring new locations or reorganizing their existing portfolio. It provides flexibility for future growth or strategic changes.

These agreements mitigate financial risks for both parties and serve as negotiation tools, enabling tenants to find suitable replacements and landlords to vet new occupants. By formalizing the transfer of lease interests, lease assignment agreements provide legal clarity, documentation, and record-keeping, thereby minimizing disputes and ensuring smooth transitions in tenancy arrangements.

Kal Gullapalli, CEO of MPZ Holdings, explains the importance of lease assignment agreements in our latest webinar .

“We spend a lot of time and money on the assignment language. In one scenario, when I first sold a portion of my European Wax Center franchise in early 2020, we were going through a lease assignment. It was 7 stores that I was taking private equity capital on that we were rolling into the new holding company. I offered the landlord everything. So I said, ‘Hey, I’m going to be CEO of the new company. I’m gonna keep my personal guarantee on in the new holding company, you have nothing to worry about’.

6 months later, he held out. There was a time where I even said to the landlord, ‘Here’s $50,000, sign the assignment’. He wouldn’t respond.

I finally got him to sign on March 11th, 2020, just before Covid shut everything down. If this had gone on to mid or late March, my deal with private equity would not have been consummated, which was in the 8 figures. 

It’s really important as you think about these leases that you focus and spend extra money on these assignments and try to make the assignment as liquid as humanly possible”.

The Benefits of Lease Assignments:

Lease assignment agreements play a crucial role in real estate transactions, particularly in the context of commercial leases. Here are some key points highlighting their importance:

Transfer of Lease Obligations :

A lease assignment agreement allows a tenant (assignor) to transfer their rights and obligations under a lease to another party (assignee). This transfer typically includes responsibilities such as paying rent, maintaining the property, and complying with lease terms.

Flexibility for Tenants :

For tenants, lease assignment agreements provide flexibility. They allow tenants to exit a lease before its expiration without incurring penalties or breaking lease terms. This can be beneficial if a business needs to relocate or downsize.

Opportunities for Landlords :

Lease assignment agreements also offer benefits for landlords. They provide landlords with the assurance that the lease obligations will continue to be met even if the original tenant decides to assign the lease to another party. This helps landlords maintain a steady stream of rental income and minimizes vacancies.

Risk Management :

Lease assignment agreements help manage risks associated with leasing property. For tenants, it can mitigate financial risks by transferring lease obligations to a new party. For landlords, it ensures that the property remains occupied and lease terms are honored, reducing the risk of income loss.

Legal Compliance :

By formalizing the transfer of lease rights and obligations through a lease assignment agreement, both parties ensure legal compliance. The agreement outlines the terms of the assignment, including any conditions or restrictions, protecting the interests of both the assignor and the assignee.

Negotiation Tool :

Lease assignment agreements can serve as negotiation tools for both tenants and landlords. Tenants may negotiate favorable terms with prospective assignees to facilitate the transfer, while landlords may negotiate additional guarantees or concessions to mitigate potential risks associated with the new tenant.

Documentation and Record-Keeping :

Having a lease assignment agreement in place provides clear documentation of the transfer of lease rights and obligations. This documentation is essential for record-keeping purposes and can help resolve disputes or misunderstandings that may arise in the future.

What Happens if Lease Assignments Aren’t Handled Correctly?

If lease assignments are not handled properly, it can have significant implications for the franchisee’s business down the road:

Legal Issues : Improperly executed lease assignments can lead to legal disputes with landlords or new tenants, resulting in financial losses or even the loss of the location.

Financial Impact : If a lease assignment is not structured favorably, it could result in increased costs for the franchisee or limit their ability to negotiate favorable terms with the landlord.

Operational Disruptions : Without clear agreements in place, transferring a lease could disrupt operations at the location, affecting revenue and customer relationships.

Impact on Sale Value : When selling a location, having unclear or unfavorable lease terms can reduce the attractiveness of the business to potential buyers, impacting its sale value.

In conclusion , lease assignment agreements are vital components of real estate transactions, offering flexibility, risk management, legal compliance, and negotiation opportunities for both tenants and landlords. They provide a structured framework for the transfer of lease interests while safeguarding the interests of all parties involved.

Leasecake is used by multi-unit operators and franchisees to manage their lease and location data, so they never have to risk losing a location again. To learn more about  Leasecake’s lease management platform  and how we can help you grow your business, manage multiple locations, save money by understanding exactly what’s in your documents, and minimize the risk of overpaying or missing a lease renewal,  schedule a demo .

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Assignment Of A Lease: Everything You Need To Know! 📃

The assignment of a lease is a legal process that allows a tenant to transfer or “sell” their lease to another party. This can be a complex process, but understanding the steps involved can help make it easier. Whether you are a landlord, tenant or prospective lease buyer or “assignee”, this guide will provide you with the information you will need to navigate the assignment of a lease.

As an existing leaseholder or commercial tenant, there are plenty of reasons why you might want to exit your business lease early. Perhaps your current premises are no longer suitable for the needs of your growing business, or maybe your business is in financial difficulty, and you need to find a lease with more favourable terms.

There are also a range of options when it comes to deciding how to exit a lease or change the occupational status of a property before the specified lease term end date.

Some of the most common include:

• Assignment of a lease, which involves selling or passing the existing lease (and remainder of the lease term) onto another party or business, who assume the role of occupational tenant;
• Terminating the lease by exercising a break option (either a rolling break option or termination of the lease on a fixed break date) by serving a formal notice on your landlord in accordance with the break clause of your lease; or
• Subletting your premises or a permitted part (with the prior consent of your direct landlord) and adopting the role of intermediate landlord yourself.

Unfortunately, exiting a lease early is not always a simple process and can be costly. A lease is a legal contract, with binding provisions and if you breach its terms, your landlord could take you to Court, sue you for damages, take remedial action and/or forfeit the lease and take back possession of the premises, depending on the nature and extent of the breach in question. Opting to pursue a process such as assigning the lease to a new tenant can make exiting a lease early possible in theory, but there are many factors that should be considered before beginning this process.

If you are thinking of trying to leave your lease early, it is advisable to obtain independent legal advice from an appropriately experienced commercial property solicitor before taking any action.

If you require legal advice or assistance on getting out of a commercial lease please call us on 0800 086 2929 , email [email protected] or complete our Free Online Enquiry Form .

In addition to office meetings, we also offer remote meetings via telephone and video conferencing software so can assist you wherever you are based.

What is assignment of a lease?

The process of assignment of a lease is essentially selling the lease to a third party (the “assignee”).

If you are a commercial property tenant, your lease likely contains a clause that would in principle allow you to assign your lease to a new tenant, subject to receiving your landlord’s prior approval and further subject to complying with certain conditions; these would usually be set out in your lease and commonly involve any number of the following:

• You as outgoing tenant providing an Authorised Guarantee Agreement (or AGA) for New Leases (post-1995), if it is reasonable in the circumstances to provide one, by way of a guarantee of the new tenant’s (assignee’s) payment of the lease rents and performance of the lease covenants going forward; and/or
• Provision of a Guarantor of requisite standing from the incoming tenant (assignee), being an individual, Director or Company, dependent on the landlord’s specific requirements; and/or
• Provision of a Rent Deposit (commonly equivalent to 3-6 months’ worth of the annual rent prescribed by the existing lease) for the landlord to hold as security; and/or
• Modern leases usually reserve a right in addition for the landlord to impose any further conditions that would be reasonable in the circumstances. Your landlord will expect this new tenant to meet the same expectations they originally set for you, and you will probably need the landlord (or indeed superior landlord’s) consent in writing before the assignment can be completed. The process for obtaining the landlord’s consent to the arrangement usually involves providing references for the proposed assignee, evidence of their financial viability and ability to comply with the lease covenants, payment of the landlord’s legal or other professional costs (e.g those of their surveyor) and the landlord being joined to a formal Licence to Assign, which would document their consent to your proposed assignment.

Whilst  your landlord is usually obliged not to  unreasonably withhold or delay their response to your application or their consent to  the proposed assignment, they are not guaranteed to provide consent and are under no obligation to give their consent if the new tenant does not  meet their standards or in the event that you cannot sufficiently evidence the proposed assignee’s ability to pay the rent(s) and comply with and perform the tenant covenants set out in your lease – so it would be  wise to be fully informed and selective  regarding the nature and identity of the proposed assignee and confident in their status and ability, in advance of you approaching your landlord with your application .

There are likely to be restrictions regarding if and when you can assign your lease, specified within the provisions of the lease document. Some common restrictions include not allowing lease assignments of part only of the premises (as opposed to the whole), if the term  is for a short period only, and not allowing the lease to be assigned if the lease would be due to end imminently, or indeed if there is a material ongoing breach of the lease terms, such as allowing the property to fall into disrepair or significant rent arrears.

Once a lease has been assigned, the assignee will become the new tenant and will be responsible for payment of the lease rent(s) and ensuring compliance with all of the tenant’s obligations in the lease, including covenants in relation to repair and maintenance of the property.

What checks will a landlord make before permitting assignment of a lease?

Before consenting to the assignment of a lease to a new tenant, your landlord will want to carry out checks to ensure the tenant you have found is a suitable replacement tenant. These checks can include:

Financial status

Your landlord will want to see evidence – usually in the form of business bank account statements – that the new tenant is an active registered company in a strong financial position.

Statements from previous landlords that the tenant has leased property from, trade references from suppliers or other professional references (for example their accountants or banking manager) will be required to show that the tenant is reliable and doesn’t have a history of missing payments or otherwise neglecting their responsibilities as a tenant or business client.

Proposed use of the premises

Your landlord will probably be looking for a new tenant to intend to use the premises in broadly the same way as you have done in the past as the lease will specify what use is permitted and if there are any restrictions on usage.

If the use of the premises is to be altered or updated it is imperative that a change of use application is made to the landlord and to the extent necessary, the local authority or planning authority. Proper consents or planning permission(s) are to be sought in advance from the local or planning authority and if approved and required, a lease variation reflecting the change of use documented in writing; for example, these provisions could form part of the Licence to Assign, to which the landlord would be joined as a party.

Likelihood of requesting alterations to the building

Your landlord will require advance notice of any alterations or fitting out works the new tenant may wish to make at the premises, and in some cases written permission in the form of a Licence to Alter, setting out plans, specifications and method statements will be required; so it would be good to have these documents prepared in readiness, for the landlord to approve. It is likely that a landlord could withhold their consent for assigning the lease to any tenant intending to make large-scale or structural changes to a property, or those that would adversely impact the energy efficiency of the property (or building of which it forms part)  and especially if the proposed plans vary significantly from the remit of alterations that are generally permitted in principle under the existing lease.

What liabilities will you have when assigning a lease?

It is important to recognise that the assignment of a lease to a new tenant does not automatically exempt you from all liabilities related to that tenancy and the property going forwards. In fact, once the lease assignment is complete you can still be liable should the new tenant miss any payments or otherwise breach the terms of the lease.

The nature and extent of what you could be held liable for depends on when your lease first began. If you entered your lease before 1 st January 1996 (Old Leases) you, as original tenant, will remain liable for all payments due under the lease and performance of the lease covenants for the duration of the lease term including from any subsequent tenants– even if you no longer occupy the property and if the lease is assigned several more times after you. This doctrine is known as “privity of contract” and is usually dealt with by subsequent tenants entering into an express indemnity covenant with the original/former tenant, establishing a chain of indemnity covenants, where there are a series of subsequent lease assignments

For “New Leases” that were entered into after 1 st January 1996, the Landlord and Tenant (Covenants) Act 1995 applies and for such modern leases, as outgoing tenant you would (if reasonably required in the circumstances) be required to sign an Authorised Guarantee Agreement (AGA). This means you would guarantee rental payments and compliance with the tenant covenants of the lease for the next tenant (your assignee and direct successor), but not any further tenants. An AGA may also provide the landlord with the option to require you to take on a new lease (on the existing terms) or pay the landlord a lump sum, often equivalent to 6 months’ worth of the annual rent.

What does lease assignment cost?

On the other hand, if the rent under the new lease is below the market rate, the new tenant may instead want to pay you a premium. These are commercial terms that a local valuation agent or surveyor would be best placed to provide you with input on.

It is highly recommended to involve your solicitor (and consider the cost of their advice) when opting to pursue a lease assignment, so as not to inadvertently break the terms of your lease and potentially leave yourself open to court action or forfeiture of your lease, from your landlord. You may also be required to cover your landlord’s legal costs and other professional fees (e.g. the fees of their agents and/or surveyors) in consideration of your application for lease assignment.

How to get out of a commercial lease – what are the alternatives?

Assignment of a lease is not the only way to exit a commercial lease and depending on your circumstances, the provisions of your lease and in the context of your professional relationship with your current landlord, it may not always be the best commercial option for you.

Some alternative ways to get out of a commercial lease early include:

Exercising a break option

Some leases incorporate a “break clause” or early “break option” which offers one party or both parties the opportunity to end the lease early in certain circumstances. Read your lease carefully to check if it contains a clause such as this, and if it does, what terms and conditions are involved, for example do you have the benefit of a rolling break option or is a fixed break date specified? Any time limits specified in the lease, provisions for giving of notice and compliance with any conditions must be strictly followed, in order for the break option to be valid. It is worth mentioning that business leases benefiting from the protection of the security of tenure provisions of the Landlord and Tenant Act 1954 cannot contain a break option for the landlord.

Negotiating a lease exit and surrender

If your contract does not include a break clause, your landlord may still be open to you exiting the lease early by way of lease surrender, subject to payment of a lump sum, as consideration. You would need to negotiate the specific terms of your exit and your landlord may require a pay-out to offset the inconvenience of having to market the property again, their loss of guaranteed rental income and to cover any dilapidations. You would enter a formal Deed of Surrender with the landlord.

Compared to lease assignment, negotiating an exit from your lease should provide a clean break with no further liabilities, but we would recommend seeking legal advice to confirm that you were exiting the contract cleanly.

Subletting the premises

A final option to consider when looking at how to exit your commercial lease early is subletting. If your contract allows it, you can take on the role of intermediate landlord by finding and leasing your property to a new subtenant.

You can use the rental income received from your new direct tenant to cover your own superior lease rent payments and obligations, but in return you would be expected to take an active role managing the property and deal with the sub-tenant directly, ensuring they comply with any superior covenants and requirements of the landlord and you would be required to promptly arrange remediation of any breaches.

You will need to comply with the provisions of your existing lease with regard to subletting which would usually include obtaining your direct landlord’s prior written consent to the arrangement, payment of their legal and/or other professional fees (e.g. surveyors costs), seeking their approval of the form of sublease and entering into a Licence to Sublet.

Need assistance with assignment of lease?

Exiting a lease early can be a complex process, whether you choose to do so by arranging the assignment of your lease or by one of the other means mentioned above.

Lease assignment is an effective way for tenants to exit a commercial lease early. However, this can be a slow process and you will incur costs.

Contacting a solicitor at an early juncture is advisable so that you are appropriately advised at the outset of any key considerations and potential pitfalls. For example, even though you are selling the lease, you could potentially remain liable afterwards; dependent on the age of the lease and whether or not you have entered into an AGA.

Gurkiran Notay is a Senior Associate in our Commercial Property Department and has a wealth of experience in dealing with commercial lease assignments.  She assists and advises clients across the UK.  In addition to office meetings in Elstead, Surrey, Gurkiran offers remote meetings via telephone or video conferencing software so would be pleased to assist you wherever you are based.

Make a Free Enquiry

If you are considering how to get out of a commercial lease or have any queries relating to any of the issues discussed in this article, please get in touch with our of our experienced property lawyers by calling 0800 086 2929 , emailing [email protected] or completing our Free Online Enquiry Form .

The content of this article is for general information only. The information in this article is not legal or professional advice. If you require legal or professional advice you should obtain independent expert advice from qualified commercial property solicitors such as those within our firm .

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Commercial Leases: Assignment vs. Sublet

(This may not be the same place you live)

  What Does It Mean to Assign a Commercial Lease?

Today it is very common that when a business merges with another business or relocates to another location, that that business will still be stuck with their old location’s lease. Other instances in which a company will seek to assign or sublet their commercial lease is when a company outgrows its commercial location or cannot make their lease payments timely. In all of these situations it is very common for a business to try and assign or sublet their commercial lease.

Assignment of a lease refers to when one party of the lease transfers all the interest and obligations of the lease to a third party. Typically in commercial settings, a commercial tenant will assign their interest in the lease to another commercial tenant. Additionally, a landlord may also assign their interest in the lease to another landlord.

However, many commercial leases will include restrictions on the ability to assign. Thus, it is important that you review your lease in order to determine if assigning your lease is possible. Your lease will note all of the rights that you, as a commercial tenant, maintain over a property.

In general, most consumer protection laws that apply to residential leases do not apply to commercial leases. However, depending on your state laws, restrictions on assignment of commercial leases may be valid if such restrictions are deemed “reasonable.”

What Does It Mean to Sublet a Commercial Lease?

Should i hire a lawyer if i want to sublet or assign my lease.

A commercial sublease occurs when a company transfers a portion of their lease rights to a third party for a temporary period. As a company, you may either sublet a portion of your office space while you continue to work in the same space, or sublet the entire office location until the end of the lease or a period of time.

For example, suppose that a company is seasonal, such as a Halloween store. If they have signed a year-long fixed lease term, they may seek to sublet the property for the 8 months in which their store is not operational in order to generate income to pay rent.

It is important to note that when subletting, the original tenant (the “sublessor”) is still obligated to the landlord for the terms of the lease. This means that the sublessor maintains “privity of estate” and “ privity of contract ” with the landlord. The sublessee, or the person that utilizes the lease for a temporary period of time, is only liable to the original tenant for the lease, not the landlord.

To clarify, the original lease between the original commercial tenant and the landlord remains throughout the sublease period, and the original tenant is responsible for the new tenant. This means that the sublessee would go to the original tenant with any concerns regarding the rental property and pay rent directly to them. Subleases have become increasingly popular for big box retail stores who seek to lease corners of their facility to smaller retail stores. They are also popular for startups that do not have enough capital to lease an entire unit, and prefer to cut costs by sharing an office space with other companies.

For instance, in grocery stores or shopping centers you may see nail salons, ophthalmology services, cell phone repair shops, banks, or even food vendors that are subleasing from the main store.

Other reasons for subleasing or seeking out a sublease include:

• Lower Rates : Rates for commercial subleases, especially short-term ones, may be less than lease rates;
• Flat Rental Payment Structure : Commercial lease often has a flat rental payment structure with no unusual surprises;
• Fewer Obligations : In a commercial sublease, the sublessee usually has limited obligations to repair and maintain common areas;
• Better Bargaining Position : A sublease may put the sublessee in an advantageous position when it comes to negotiating a new lease with the landlord directly (i.e., when the main lease ends);
• Less Complex Lease : Commercial subleases are usually not as complex as commercial leases; or
• Additional Income : As noted above the most common reason for subleasing is to gain an additional source of rental income in order to make or lessen your lease payments.

As can be seen, there are numerous advantages for subletting or seeking out a sublease arrangement as a company. However, there are disadvantages for subletting your lease, such as being on the hook for any missed or late payments from your sublessor that may cause you to default on your lease with the landlord. Further, as noted above, as the sublessor, you are responsible for maintaining the location and providing repairs.

However, if in the lease the landlord has a duty to make repairs , then as the sublessor you will act as the intermediary to ensuring that the repairs are done timely, meaning that as a sublessee repairs may be delayed.

In sum, assigning or subletting your lease may be a great option for companies today. Assignment of a lease may be a better option for companies seeking to move away from their office location permanently; however, subletting may be a superior option for companies seeking to generate an additional source of income in their larger location.

As opposed to an assignment of a lease, which allows the original tenant to completely transfer their full lease interests to a third party, subletting a lease causes the original tenant to still be on the hook for repairs and payments from the third party to the landlord. As can be seen, commercial lease agreements can be very complex. Thus, it may be in your best interest to consult with an experienced and well qualified real estate lawyer to help you understand your options for assigning or subletting a lease. A licensed real estate attorney will be able to guide you through the process of assigning or subletting your lease and ensure that your interests are taken care of.

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Assignment and Consent Standards in Commercial Leases

Mar 6, 2020

Assignment provisions in commercial leases are heavily negotiated and very important to both landlords and tenants. This article presents a brief overview of the assignment provision in commercial leases, both office and retail.

Assignment provisions in commercial leases are heavily negotiated and very important to both landlords and tenants. When a tenant’s interest in a lease is assigned, the tenant is transferring its entire leasehold interest and 100% of the leased premises to a third party for the entire remaining term of the lease. For the tenant, the assignment provision represents a potential exit strategy, dependent of course on the local market, and increased flexibility for future needs. For the landlord, the assignment offers greater security for its revenue stream and hopefully the avoidance of a tenant bankruptcy or default while keeping its building occupied. The tenant’s desire for flexibility and the landlord’s need for control is where the negotiations are focused. This article presents a brief overview of the assignment provision in commercial leases, both office and retail, with particular attention on the laws of Maryland, Virginia and the District of Columbia. The landlord’s standard for providing consent to a request to an assignment will be reviewed, and we will conclude by offering suggested language.

What If The Lease Does Not Contain An Assignment Provision?

The law traditionally favors the free alienation of property. Therefore, under the laws of almost every state, if the lease is silent on whether the landlord’s consent to an assignment is required, then the commercial tenant has the right to assign its interest. This is true in Maryland, Virginia and the District of Columbia. Given this baseline, almost every lease form will have a detailed provision setting forth the assignment process. Note also, however, that in most states it is also enforceable for a commercial lease to have an outright prohibition against assignments. Such a provision would likely be a non-starting deal point for most sophisticated tenants.

What Does Reasonable Mean?

If a lease simply provides that the tenant requires landlord’s consent to an assignment, but does not include the standard for giving or withholding that consent, then in many states the implied standard is that the landlord’s consent may not be unreasonably withheld. Historically this was the minority view, with the historical rule allowing the landlord to withhold consent for any reason. The implied duty of reasonableness is now more the norm as more states adopt this position when presented with the issue. There is express case law establishing this rule in Maryland, and most courts in Virginia and Washington, DC will imply such a covenant of good faith and fair dealing. Most states, though, do allow a landlord the sole right to grant or withhold its consent if the lease clearly expressly provides, and in Maryland the lease must specifically state that the landlord’s consent may be granted or withheld in the sole and absolute subjective discretion of the landlord. Again though, a sophisticated tenant with any leverage should never agree to such a provision.

Most negotiated leases will instead contain a provision requiring that landlord’s consent to an assignment is required, but such consent will not be unreasonably withheld. The tenant will likely also try to include landlord’s obligation to not unreasonably delay or condition its consent. A short clause without further defining what constitutes “reasonableness” generally favors the tenant, and landlords typically prefer including specific standards as to the criteria it can consider when reasonably deciding whether or not to consent to an assignment. Without such specificity, defining “reasonable” is difficult as the landlord and tenant clearly will have differing viewpoints and it may be left as a factual question to be decided in litigation. The typical definition (set forth in the Restatement (Second) of Property) would be that of a reasonably prudent person in the landlord’s position exercising reasonable commercial responsibility.

Absent a detailed provision listing the criteria a landlord can consider when reasonably reviewing a request to assign, a landlord is typically found to be considered reasonable if it considers certain general broad factors. First, the landlord reviews the assignee’s proposed use. In a retail setting, the landlord will be concerned whether the proposed use fits with the existing center and/or violates any existing exclusives or insurance requirements. In an office setting, the landlord might review the expected traffic and wear and tear on the building. Second, the landlord will consider the creditworthiness of the assignee. The landlord (and the assignor) will want to be confident that the assignee is capable of performing tenant’s obligations under the lease and a large creditworthy tenant increases the value of the asset. The assignor might argue that a strict financial test (such as a minimum net worth, for example) is unfair since the assignor is likely not being released upon the assignment and the landlord can still pursue the assignor in the event of a default. Third, the landlord will review the experience and history of the assignor. As mentioned above, landlords instead prefer a detailed list setting forth the many factors that they can include as part of reasonably reviewing a request for a lease assignment.

Without further establishing the criteria, the landlord puts itself at risk of a challenge by the tenant that a denial of a consent is unreasonable.

In defining “reasonable,” courts typically do not allow a landlord to deny or condition consent to an assignment based purely on economic reasons where the landlord results in substantially increasing what it was entitled to under the lease. In Washington, DC, there is well established case law holding that it is unreasonable for a landlord to withhold consent solely to extract an economic concession or improve its economic position. For example, a court would not consider it reasonable for a landlord to condition its consent on the assignee paying a greatly increased rent. Instead, as discussed below, landlords should look to protect their interests in a market of increasing rents by providing for either the sharing of excess rentals or a right to recapture.

What Are Typical Provisions In an Assignment Clause?

As discussed above, tenants generally prefer a short assignment provision simply requiring the landlord to not unreasonably withhold, condition or delay its consent to an assignment. But most leases are drafted by landlords, and over the years the assignment provisions have evolved to contain many typical provisions in addition to further defining “reasonableness,” including the following below.

• Sharing of Excess Rents. Since many states do not permit a landlord to condition its consent on improving its economic position (e. g. , by increasing the rent), most leases instead contain a provision where the landlord is entitled to all or a portion of the profits. The profits may mean increased rent, or it may even be construed more broadly to consider the value of the location in a sale of the tenant’s business. The landlord’s argument is that it doesn’t want the tenants competing in the real estate market. The tenant should push back here, and certainly try to lower the percentage shared, carve out any consideration received in the sale of tenant’s business, and only share profits after all of the tenant’s reasonable costs incurred in connection with the assignment were first deducted.
• Corporate Transfers. Since a purchase of the entity constituting tenant is likely not deemed an assignment under the law, most leases make clear that any such corporate sale, including the sale of either a controlling interest in the stock or substantially all of the assets of the tenant, is deemed an assignment for purposes of the lease. The tenant should carve out permitted transfers for typical mergers and acquisitions under certain conditions, and also carve out routine transfers of stock (or other ownership interests) between existing partners or for estate planning purposes. The landlord will likely accept a permitted transfer concept provided they receive adequate notice and the successor entity succeeds to all of the assets of the original tenant with an acceptable net worth.
• Assignment Review Fee. Most landlords include in their form lease the requirement that the tenant reimburse them for legal and administrative expenses incurred in reviewing the request for consent and preparing the assignment. The tenant clearly wants to keep these fees reasonable and in keeping with the local market.
• Recapture Rights. Landlords like to include the express right to recapture the premises in the event the tenant comes to it to request a consent for an assignment. A recapture clause allows the landlord to terminate the lease if market rents have increased or if it needs the space for another use. Sophisticated tenants should push back here as much as leverage allows, try to limit the time periods, and if nothing else try for the right to nullify the recapture by rescinding its request for the consent.
• Tenant’s Remedy. To protect themselves from claims for damages from the tenant if the landlord withholds its consent to a requested assignment, landlords often include a provision where the tenant waives its rights to monetary damages in such a situation and can only seek injunctive relief. The tenant should try to delete this provision, or at least, if leverage permits, provide for the right to seek damages if the landlord is subsequently found to have acted in bad faith.

Assignment provisions are heavily negotiated and both the commercial landlord and tenant need to be advised to the applicable local law and know the market for a comparable transaction. ( Note: The author represents office and retail landlords and tenants throughout Virginia, Maryland and the District of Columbia.) Sample reasonableness provisions for both office and retail uses are copied below for reference.

Retail Lease

Landlord and Tenant agree, by way of example and without limitation, that it shall be reasonable for Landlord to withhold its consent if any of the following situations exist or may exist: (i) In Landlord’s reasonable business judgment, the proposed assignee lacks sufficient business experience to operate a business of the type permitted under this Lease and to a quality required under this Lease; (ii) The present net worth of the proposed assignee is lower than that of Tenant’s as of either the date of the proposed assignment or the date of this Lease; (iii) The proposed assignment would require alterations to the Premises affecting the Building’s systems or structure; (iv) The proposed assignment would require modification to the terms of this Lease, or would breach any covenant of Landlord in any other lease, insurance policy, financing agreement or other agreement relating to the Shopping Center, including, without limitation, covenants respecting radius, location, use and/or exclusivity; (v) The proposed assignment would conflict with the primary use of any existing tenant in the Shopping Center or any recorded instrument to which the Shopping Center is bound; and/or (vi) The proposed assignment or subletting would result in a reduction in the Rent collected by Landlord during any portion of the term of this Lease.

Office Lease

Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply: (i) The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building; (ii) The Transferee intends to use the Premises for purposes which are not permitted under this Lease; (iii) The Transferee is a governmental agency; (iv) The Transfer occurs prior to the first anniversary of the Lease Commencement Date; (v) The Transferee has a net worth of less than $10,000,000.00; (vi) The proposed Transfer would cause a violation or trigger a termination right of another lease for space in the Building; or (vii) Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, (i) occupies space in the Building at the time of the request for consent, or (ii) is negotiating with Landlord to lease space in the Building at such time, or (iii) has negotiated with Landlord during the six (6)-month period immediately preceding the Transfer Notice.

Reprinted with permission from the March edition of the Commercial Leasing Law & Strategy© 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected] .

• John G. Kelly

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Lease Assignment in Commercial Real Estate

A lease assignment occurs when a tenant fully transfers their lease to another party. This is particularly important for tenants who wish to get out of their leases early due to financial issues, especially if a landlord does not allow subleases. In general, the landlord must agree to the lease transfer, and usually records their consent to it via a document called a “license to assign.”

• What is a Lease Assignment?
• The Differences Between Subleases and Lease Assignment
• Lease Assignment and Tenant Liability
• Lease Renewal and Recapture Clauses
• Additional Lease Assignment Requirements
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What is a lease assignment in commercial real estate?

However, a landlord is generally required to give what’s called “reasonable consent” when deciding whether to allow a tenant to assign a lease or find a new tenant to sublease the property. For example, as long as potential (new) tenants have good credit and strong financials, a landlord should not arbitrarily deny the original tenant the ability to assign the lease or provide a sublease. In addition, some leases have a clause which stipulates the specific time period in which a landlord must decide whether to approve a new tenant for lease assignment.

While a sublease can be for only part a leased premises, in most cases, a lease assignment must be for the entire premises. For instance, if a tenant leasing a 10,000 sq. ft. property wanted to lease out only 4,000 sq. ft. to another party, they would typically have to do so through a sublease rather than via a lease assignment.

Finally, some leases also stipulate that if a lease is assigned to a new tenant, and the original tenant profits (usually due to the sale of the business), the landlord has a right to a certain share of those profits.

What are the benefits of a lease assignment in commercial real estate?

A lease assignment in commercial real estate can be beneficial for tenants who want to transfer their lease to another party. Benefits include:

• The ability to transfer the entire leased premises, rather than just part of it.
• The potential to make a profit from the sale of the business.
• The ability to find a suitable replacement tenant.
• The potential to reduce financial liability for the landlord.

It is important to note that the original tenant may still be liable if the new tenant defaults, unless the landlord releases them from their liability. Additionally, landlords may be picky about which tenants they allow, and may want to ensure that the new tenant is at least as creditworthy as the previous one. Creditworthiness may be measured in EDBITA, business net worth, or other metrics. Source

What are the risks associated with a lease assignment in commercial real estate?

Lease assignments in commercial real estate carry some risks for the original tenant. Unless the original tenant is fully released from their liability by the landlord, they will be legally liable if the new tenant defaults. This means that the landlord could sue the original tenant for back rent if the new tenant fails to pay.

In addition, landlords may be especially picky in their choice of tenants when it comes to triple net leases, as they are often trying to reduce their financial liability as much as possible. They will typically want to ensure that the new tenant is at least as creditworthy as the previous one. Creditworthiness may be measured in EDBITA, business net worth, or other metrics. In many cases, they also want to know that the leased property is at least somewhat important to the new tenant’s business operations— otherwise, the tenant may be more likely to let the property fall into disrepair, or, even worse, default on their lease.

What are the legal requirements for a lease assignment in commercial real estate?

A lease assignment occurs when a tenant fully transfers their lease to another party. The landlord must agree to the lease transfer, and usually records their consent to it via a document called a “license to assign.”

What are the steps involved in a lease assignment in commercial real estate?

The steps involved in a lease assignment in commercial real estate are as follows:

• The tenant must fully transfer their lease to another party.
• The landlord must agree to the lease transfer and usually records their consent to it via a document called a “license to assign.”
• The landlord is generally required to give what’s called “reasonable consent” when deciding whether to allow a tenant to assign a lease or find a new tenant to sublease the property.
• The landlord must decide whether to approve a new tenant for lease assignment within a specific time period, as stipulated in the lease.
• In most cases, a lease assignment must be for the entire premises.
• If the original tenant profits (usually due to the sale of the business), the landlord has a right to a certain share of those profits.

What are the common mistakes to avoid when assigning a lease in commercial real estate?

When assigning a lease in commercial real estate, it is important to ensure that the new tenant is at least as creditworthy as the previous one. Creditworthiness may be measured in EDBITA, business net worth, or other metrics. Additionally, the landlord may want to ensure that the leased property is at least somewhat important to the new tenant’s business operations. It is also important to note that a lease assignment must be for the entire premises, and not just part of it. Finally, some leases also stipulate that if a lease is assigned to a new tenant, and the original tenant profits, the landlord has a right to a certain share of those profits.

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Lease Assignment Provisions—Why They Matter

When a tenant assigns its rights and interest under a lease to a successor tenant, the enforceability of the assignment and its legal consequences are usually addressed and governed by language in the assignor-tenant’s lease or a lease assignment document. The landlord’s attorney usually will provide carefully-crafted language sufficient to resolve almost every issue related to assignment that could arise. Even so, it is helpful to understand the law behind assignment provisions and to be aware of the most common legal issues landlords sometimes face despite those protective provisions.

The law of most states does not distinguish between usufruct leases, which confer mere use rights (usually shorter term leases) from estate-for years leases, which grant an interest in land ( e.g. , a 99-year ground lease). Georgia law, however, distinguishes between these two types of leases. The assignment of a Georgia usufruct lease, but not an estate-for-years lease, releases the assignor-tenant from liability to pay rent owed by the defaulting assignee-tenant unless the landlord expressly reserves the right to proceed against the assignor-tenant. By contrast, unless assignment language provides otherwise, a tenant who assigns its estate-for-years lease remains fully liable with the assignee-tenant for rent that accrues for the balance of the lease term.

Since an estate-for-years tenant has an interest in land, that tenant may freely assign its lease without the landlord’s consent or permission absent surrender of that right in the lease. The rights and interest of the tenant under the estate-for-years lease “run with the land,” which means that those rights are tied to the property and not to the owner. Whenever an assignment occurs, those rights transfer from the first tenant to the second (though, as noted above, the original tenant usually remains fully liable for future rent). The tenant holding only a usufruct interest (use right) under its lease has no such right of assignment absent language in its lease or an assignment document expressly allowing assignments. Almost always, the landlord who gives the usufruct tenant an assignment right reserves the landlord’s right to give its consent to any proposed assignment of a usufruct lease. An estate-for-years lease is less likely to include a provision allowing the landlord to reject a proposed assignment.

Legal issues may arise because a tenant simply ignores (or cleverly avoids) the assignment language. Occasionally, a tenant holding only a use right under its lease will transfer possession of its leased premises to a successor tenant without seeking permission of the landlord required under the assignment provision in the lease. An unauthorized assignment may also occur where the tenant changes the legal entity under which it operates its business in the leased premises, which can take place through merger or stock transfer. In such a case, a vigilant landlord would then have the unilateral right to elect to treat its assignor-tenant’s unauthorized assignee-tenant as the landlord’s tenant under the lease for the full term, thus giving rise to a new landlord-tenant relationship. If the landlord exercises this right of election, the original tenant’s obligations under the usufruct lease will be extinguished unless the lease expressly maintains those obligations. Alternatively, the landlord may expel the assignee as an unlawful intruder, in which case the original tenant remains fully obligated under the lease for the balance of its term.

Especially where a landlord receives rent from its tenant through a drop-box or electronic funds transfer (EFT), a tenant seeking to escape a burdensome lease might shift the rent payment obligation to an unapproved successor tenant about which the landlord may be unaware. If the landlord accepts rent from someone other than the original tenant under the usufruct lease over a period of time, the landlord may be deemed as a matter of law to have waived its right to object to and expel the unauthorized replacement tenant. For this reason, it is advisable for a landlord to cease acceptance of rent through EFT or drop-box delivery and insist upon verifiable means of payment where a tenant is struggling and proposes a lease assignment.

To address unintended consequences that force an unwanted assignment upon a landlord, the assignment language should perhaps include language that prohibits assignments by operation of law associated with a merger or certain other types of business transactions. A transfer of control within a corporation or other business entity through altered equity interests might effectively constitute an assignment from the viewpoint of the landlord, so the language must address that issue as well. To encourage a tenant to seek consent, it may be wise for a landlord to agree that its consent will not be unreasonably withheld . Since courts generally disfavor restrictions on alienation of leases, a provision that gives the landlord the absolute right to withhold consent to an assignment may be subject to attack in court in the future. While assignment provisions in leases and assignment documents cannot necessarily and completely eliminate all risks associated with unanticipated changes in the lease assignment law and wily efforts of tenants to advance their interests through unauthorized lease assignments, a landlord can minimize the risk through carefully worded assignment provisions and a proper level of understanding of the legal issues usually associated with unauthorized assignments.

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Assignment And Assumption Of Lease: Definition & Sample

Jump to section, what is an assignment and assumption of lease.

An assignment and assumption of lease is a legal real estate document that allows one party to transfer rights and obligations of a lease to another party. Often used in real estate transactions and mortgage lending, the assignment and assumption of lease agreement requires the landlord to consent to move forward.

An assignor may include an assumption agreement to provide legal protection by transferring obligations to the new tenant. For example, if a tenant defaults on a mortgage or stops paying rent, the original seller is no longer liable. Assignment and assumption of lease agreements cover terms like who is newly responsible for the lease and the landlord's contract for this agreement.

Common Sections in Assignment And Assumption Of Leases

Below is a list of common sections included in Assignment And Assumption Of Leases. These sections are linked to the below sample agreement for you to explore.

Assignment And Assumption Of Lease Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.2 2 d425646dex102.htm ASSIGNMENT AND ASSUMPTION OF LEASE , Viewed October 18, 2021, View Source on SEC .

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Assignment of Lease Explained

• December 1, 2023

Understanding the complexities surrounding the assignment of a lease is crucial for both tenants and landlords. Within the UK, various situations might compel a tenant to transfer their lease to another party. In this guide we will delve into the essentials, helping you understand every facet of a lease assignment.

What is an Assignment of Lease?

In the world of property management and real estate, the concept of an “assignment of lease” is fundamental. It involves a tenant, known as the assignor, transferring their entire legal interest in a property to another individual or entity, called the assignee. This process is common in both residential and commercial contexts and plays a significant role in maintaining the fluidity of property interests, especially in a dynamic market.

When a tenant signs a lease, they agree to specific commitments, including paying rent and maintaining the property, which are enforceable for a set period. However, various circumstances may prompt a tenant to vacate the property before the lease term expires. Herein lies the importance of the assignment of lease.

Through lease assignment, the original tenant can exit the property and pass on the responsibility to a third party, who then assumes the role of the tenant with all its incumbent responsibilities. It’s important to note that while the new tenant steps into the shoes of the original tenant, the lease terms remain unchanged.

For instance, if an individual rents a flat and later decides to move out before the lease’s expiration due to reasons such as relocating for a job or changing living situations, they may opt for an assignment of the lease. This strategy allows another person to take over the living space and adhere to the responsibilities under the original lease, ensuring that the flat does not remain unoccupied and the landlord continues to receive rent payments. This seamless transition can be especially beneficial in residential areas with high demand for housing, as it minimises financial instability for the landlord and provides immediate accommodation for those in need of a home.

Key Components of Lease Assignment

• Assignor and Assignee: The existing tenant (assignor) and the new tenant (assignee) are the primary parties in this agreement. Their willingness to transfer and assume the lease’s obligations, respectively, drives the assignment process.
• Landlord’s Role: While not a direct party to the assignment, the landlord plays a pivotal role. Most lease agreements stipulate that landlords must provide consent before any assignment takes place. This clause protects the landlord’s interests, ensuring the new tenant is reliable and meets the required standards.
• Legal Documentation: The process requires several legal documents, including the initial lease agreement and a deed of assignment. The latter must clearly articulate that all rights and responsibilities have been transferred to the new tenant. This precision prevents future disputes regarding the terms of the lease.
• Liabilities: The assignment of lease doesn’t inherently absolve the original tenant of responsibilities. Depending on the agreement’s terms, the assignor might remain liable if the assignee fails to fulfil the lease obligations. This potential continued liability underscores the importance of thorough assignee vetting.

The Legal Ground

The legality surrounding the assignment of a lease is rooted in UK property law. It necessitates compliance with various statutory requirements and often involves complex legal procedures. Consequently, parties usually engage solicitors to ensure that the assignment aligns with legal protocols, protecting the interests of all involved parties.

The assignment of a lease is a nuanced process, influenced by factors unique to each situation. Whether prompted by personal, business, or financial changes, lease assignments facilitate flexibility in property occupancy and use. Understanding this concept is crucial for tenants seeking an early exit from a lease, individuals looking for established lease properties, and landlords wishing to maintain continuous tenancy and income streams.

Understanding the Deed of Assignment of Tenancy

A “deed of assignment tenancy” is a legal document that evidences the transfer of lease obligations from the current tenant to another. It is an essential part of the lease assignment process, binding the new tenant to the terms stated in the original lease.

Landlord’s Checks Before Permitting Assignment of a Lease

The assignment of a lease, while beneficial in maintaining continuous occupancy and consistent rent payments, necessitates thorough due diligence on the part of the landlord. Before consenting to an assignment, it’s imperative for landlords to conduct comprehensive checks, mirroring the depth of evaluation done during the initial tenant screening process. These checks are crucial in mitigating potential risks and safeguarding the landlord’s investment.

Detailed Assessment of the Prospective Assignee

Landlords should ascertain the financial stability and reliability of the assignee. This assessment often involves:

• Credit Checks: This allows landlords to have a clearer understanding of the prospective assignee’s credit history, highlighting their ability to keep up with regular rent payments and financial commitments.
• Employment Verification: Landlords typically require proof of ongoing, stable employment. This verification helps ensure that the new tenant has a consistent income stream capable of covering the rent and other associated costs.
• References: Previous landlords or property managers can provide insights into the assignee’s behaviour, paying habits, and overall reliability. Personal references might also be necessary to form a more comprehensive view of the prospective tenant.

Review of the Assignee’s Intent

Understanding the prospective tenant’s reasons for seeking the property and their long-term intentions can provide reassurance. For instance, landlords should feel more comfortable knowing that the assignee plans to reside in the property for an extended period and doesn’t intend to sublet without permission or engage in unlawful activities.

Examination of Financial Documentation

Landlords may request documentation such as bank statements or savings accounts to further verify the assignee’s ability to afford the property. This scrutiny is particularly pertinent in higher-rent areas or for properties with higher maintenance costs.

Ensuring Contractual Compliance

It’s important for the landlord to confirm that the assignee understands and agrees to the terms set out in the original lease. The assignee must comply with all existing conditions, and any deviation needs to be negotiated with and approved by the landlord.

Legal Considerations

Given the legal complexities surrounding lease assignments, landlords often seek legal advice during this process. Lawyers can help ensure that the assignment adheres to local property laws, the original lease’s terms, and that the landlord’s interests are thoroughly protected throughout the transition.

By conducting these comprehensive checks, a landlord exercises due diligence, significantly reducing the likelihood of issues arising from the assignment of the lease. This meticulous approach helps maintain the property’s revenue stream, upholds community standards, and ensures the continued preservation and value of the property investment. It’s a proactive measure, providing the landlord with peace of mind that they are handing over their property to a reliable and responsible assignee.

Costs Involved in Lease Assignment

The process of lease assignment, while a practical solution for tenants looking to transfer their lease obligations, does entail various costs that both the assignor (original tenant) and assignee (new tenant) need to consider. These expenses contribute to a seamless transfer process, ensuring all legalities are properly managed, and all parties are adequately protected. Understanding these costs is essential as it prevents unexpected surprises and allows for a more transparent transaction.

Costs for the Assignor

• Advertising Costs: If the landlord does not immediately have a new tenant, the original tenant may need to advertise the property. This could involve online listings, printed materials, or hiring an estate agent to expedite the process, all of which incur costs.
• Tenant Screening Costs: The assignor might opt to conduct preliminary screenings of potential assignees, which include credit checks, reference checks, and other background investigations to ensure they’re presenting a reliable tenant to the landlord.
• Legal Fees: The legal intricacies of transferring a lease require the involvement of legal professionals. The assignor typically bears the cost for legal consultations, drafting the deed of assignment, and any related legal documentation.
• Landlord’s Administrative Fees: Some landlords charge an administrative fee for processing a lease assignment, covering the time and resources they expend to conduct their checks and modify their records.
• Potential Liability Costs: If the assignee fails to meet the lease obligations, and depending on the terms of the assignment, the original tenant may remain partially liable. This contingent liability could lead to future costs.

Costs for the Assignee

• Security Deposit: It’s standard practice for the new tenant to provide a security deposit before moving in. In some cases, the assignee reimburses the original tenant for the initial deposit, depending on its condition and any agreement between the parties.
• Advance Rent: The assignee may need to pay the first month’s rent in advance, similar to standard leasing arrangements.
• Legal Fees: Assignees also incur legal fees. They need legal counsel to review the terms of the lease, ensure the assignment is conducted correctly, and understand their new responsibilities and liabilities.
• Stamp Duty: Depending on the property’s value and the lease’s remaining duration, the assignee might need to pay Stamp Duty Land Tax (SDLT) on the premium or the rent of the lease.

Shared Costs

In some instances, both parties negotiate and equally share specific costs, such as those for legal consultations, to ensure fairness and mutual satisfaction in proceeding with the transaction.

Both assignors and assignees must factor in these expenses to accurately assess whether a lease assignment is a financially viable option. It is advisable to consult with real estate professionals and legal advisors to understand all potential charges fully. Having a clear, upfront understanding of these costs allows both parties to make informed decisions, ensuring a smooth, transparent, and fair transition process.

Does Assignment Create a New Tenancy?

No, an assignment does not create a new tenancy. It merely transfers the existing tenant’s rights and obligations to the new tenant, who then steps into the shoes of the original tenant under the same lease terms.

The Necessity of Legal Assistance

It is highly advisable to engage a solicitor during the assignment of a lease. A solicitor can provide necessary legal advice, prepare the deed of assignment of lease, and ensure compliance with various property and contract laws.

Deed of Assignment vs Tenancy Agreement

While they might sound similar, a deed of assignment is not the same as a tenancy agreement. The former refers to the document transferring existing lease rights to a new tenant, while the latter is a contract outlining the terms between a landlord and tenant for new occupancy.

Parties Involved in Signing the Deed of Assignment

The deed of assignment of lease is typically signed by the outgoing tenant, the incoming tenant, and sometimes, the landlord, especially when their consent is a prerequisite for the lease transfer.

Landlord’s Consent to Lease Assignment

A landlord can refuse to consent to assign a lease, but this refusal must be reasonable. Scenarios for justifiable refusal might include the prospective tenant’s inability to meet financial commitments or proposed use of the property that violates lease terms.

Lease Assignment vs Subletting

• Lease assignment involves the complete transfer of the tenant’s rights to another party.
• Subletting occurs when the tenant temporarily hands over the property rights to another party but retains some rights or eventually plans to return.

Financial Responsibilities in Lease Assignment

Typically, the outgoing tenant or the incoming tenant covers the costs related to the assignment of lease, such as legal fees, administrative charges, and any leasehold improvements. The specific arrangements may vary based on mutual agreements.

Assigning a Lease Without a Deed: Is It Possible?

No, a lease assignment must be evidenced by a deed to be legally binding. The deed of assignment tenancy is crucial as it protects the interests of all parties involved and provides legal clarity.

The Meaning of ‘Assignment’ in Rent Context

In the context of renting, ‘assignment’ refers to transferring the existing tenant’s lease obligations and rights to another party. The assignee assumes responsibility for rent payments and adherence to the lease terms.

Advantages of Assigning a Lease

There are several benefits associated with the assignment of a lease, including:

• Flexibility for the tenant needing to vacate the property before lease termination.
• Minimal interruption in rent payments for the landlord.
• Opportunity for another tenant to occupy the premises without having to negotiate a new lease.

Stamp Duty and Lease Assignment

Stamp duty on assignment of lease may apply depending on the premium paid and the lease’s yearly rent. It’s important to consult a solicitor to understand any potential tax implications.

Post-Assignment Liabilities for Tenants

After the assignment of a lease, the original tenant is generally released from future liabilities. However, they may remain liable if the new tenant defaults, depending on specific lease terms or if guarantees were provided.

Essential Documents for Lease Assignment

In the process of a lease assignment, several critical documents must be prepared, reviewed, and signed to ensure a legally binding transfer of rights and responsibilities from the original tenant (assignor) to the new tenant (assignee). These documents are crucial in defining the terms of the assignment, protecting the interests of all parties involved, and complying with legal standards. Here are the essential documents required for a successful lease assignment:

1. The Original Lease Agreement

• Before any transfer, all parties must review the original lease. It’s vital to understand any clauses or terms that could impact the assignment, such as conditions requiring the landlord’s consent for any lease transfer.
• The original lease agreement serves as the foundation for the assignment, outlining the terms and obligations that the assignee will need to adhere to.

2. Deed of Assignment of Lease

• This legal document formally transfers the lease obligations from the assignor to the assignee. It must clearly state the terms under which the lease is assigned, including any continuing liabilities of the assignor, if applicable.
• It should be comprehensive, detailing the rights and responsibilities of all parties and any guarantees provided by the assignor.
• The deed is usually drafted by a solicitor to ensure that it complies with legal standards and adequately protects everyone’s interests.

3. Landlord’s Consent to Assignment

• Most leases require the landlord’s formal approval for any assignment to occur. This document is the landlord’s written agreement, permitting the transfer from the current tenant to the new one.
• It may come with conditions the assignee must satisfy, which should be clearly outlined in the consent form.

4. Assignee’s Letter of Acceptance

• This document is proof that the assignee understands and agrees to the terms set out in the original lease and the deed of assignment.
• The letter may restate key lease terms for clarity and will affirm the assignee’s commitment to abide by all the lease conditions and responsibilities.

5. Legal Advisories

• Though not a formal part of the lease assignment, documentation of legal advice received by both the assignor and assignee (and possibly the landlord) is crucial.
• These advisories ensure each party has been informed of their legal rights and obligations, potentially offering protection in the event of future disputes.

6. Inventory List

• If relevant, an inventory list detailing the condition of the property, especially for furnished rentals, would be necessary. This document helps manage expectations and responsibilities concerning the property’s state and contents at the time of the assignment.

7. Proof of Assignee’s Financial Stability

• While not always formally part of the assignment documentation, evidence of the assignee’s ability to meet financial commitments (like bank statements or employment confirmation) often needs to be submitted to the landlord during the assignment process.

The process of assigning a lease is a complex legal transaction that requires strict adherence to procedural standards. These essential documents ensure that the assignment progresses smoothly, with clear understanding and agreement from all parties involved. Both assignor and assignee should seek legal counsel to ensure their interests are protected, and all documents are in order, further underscoring the importance of each document’s role in this pivotal real estate process.

Energy Performance Certificate (EPC) Requirements

Yes, an EPC is generally required for a lease assignment, especially if the building is to be sold or rented out. This certificate ensures that the property meets the necessary energy efficiency standards.

Registering an Assignment of Lease

Registration of an assignment of lease is crucial. It validates the change of tenant under the lease, making it legally binding and enforceable. This process usually involves submitting the deed of assignment to the appropriate land registry.

Timeframe for Assigning a Lease

Assigning a lease can take anywhere from a few weeks to several months, depending on factors like obtaining the landlord’s consent, the new tenant’s credibility, and the speed of legal processes.

Embracing the Benefits of Lease Assignment

Whether you’re a tenant seeking flexibility or a landlord desiring continued occupancy, lease assignment offers solutions that can cater to your individual needs, promoting ease and continuity in the leasing process.

If you’re considering a lease assignment, it’s paramount to seek professional advice to navigate the complexities involved. The information contained in this article should be used for information purposes only and should not be relied upon in place of specific legal advice.

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• Important Lease Concepts Restaurateurs Should Know

As all restaurateurs know, a good location is an essential ingredient in any recipe for long-term success.

But controlling costs is also a key factor. Renting your location—rather than actually purchasing real estate—can help with both by providing access to a much larger pool of possible locations and while reducing the need for a large upfront capital investment. In order to maximize these advantages, however, restauranters need to secure the best possible lease agreement—one that has undergone a comprehensive legal review, and then negotiated to obtain the best terms possible for both brand-new and well-seasoned restaurateurs opening a new location or concept.

Therefore, when negotiating a new lease agreement, restaurateurs should understand the various types of leases and key terms that are often present in such agreements.

Types of Leases

There are three main types of lease agreements that can be used for a restaurant: (1) a gross lease; (2) a net lease; and (3) a percentage-based lease. The type of lease for each location will likely be determined by the landlord but should be open for negotiation.

A gross lease is a type of lease that builds all costs, including operating expenses and other charges, directly into the monthly rental amount being paid to the landlord. A gross lease provides a restaurant with a clear picture of what its monthly charges relating to the lease agreement will be.

A net lease is a lease agreement which shifts some (or all) of the costs of operating expenses directly onto the restaurant. These costs will be in addition to the base rent being paid to the landlord (the base rent will usually be a lower amount due to the pass-through of expenses). The most common net lease is a “triple net” lease agreement which shifts all operating expenses onto the restaurant. These expenses include maintenance costs, insurance and real property taxes.

A percentage-based lease is a lease agreement that has a set base rental amount, plus the possibility of additional amounts being paid to landlord based on the restaurants monthly sales. The percentage concept is sometimes included in either a gross or net lease to create a hybrid lease agreement.

Common Terms in Restaurant Leases

• Permitted Use: A lease agreement will include a section that defines the permitted use at the location. While it is likely a landlord will want to narrowly tailor the permitted use (i.e., the specific type of restaurant that will be operated), a restauranter will want to keep the permitted use somewhat loose (i.e., just listing “operation of a restaurant”) to allow for a change to the style of the restaurant to adapt to new market trends. The permitted use definition should also include the sale of alcohol and right to use delivery services such as Door Dash and Grub Hub, if applicable.  
• Hours of Operation: A commercial landlord will likely want to include pre-determined hours of operation as well as a continuous operations clause in the lease agreement. A restaurateur should be mindful of these requirements during negotiation. At the very least, the restaurateur should be comfortable with the established hours of operation and request certain closure period to allow for renovations, observance of holidays and force majeure events (i.e., an extraordinary, unforeseen event beyond the control of the owner, such as flash flooding or a strike).
• Maintenance and Repair Obligations: It is important for a restaurateur to clearly understand its maintenance and repair obligations prior to entering into a lease agreement. It is common for the restaurateur to be obligated to repair and maintain items such as the HVAC system and grease trap (if exclusively serving the restaurant). If these items are shared with other tenants at the location, such repair and maintenance should be completed by the landlord and the restaurateur should be charged for its proportionate share of these items.
• Assignment and Sublet Rights: Almost all commercial lease agreements include terms pertaining to the assignment of the lease agreement or sublet of the location. Most commercial landlords try to limit these rights as much as possible to prevent free assignment or sublets from occurring during the term of the lease agreement. At the very least, a restaurateur should try and negotiate a permitted assignment clause, which allows assignment of the lease agreement in certain circumstances without the consent of the landlord (i.e., if the restaurant is going to be sold to a new operator).
• Insurance Requirements: When a restaurateur enters into a new lease agreement, we highly recommended that the insurance provisions be reviewed by the restaurateur’s insurance agent to ensure the minimum coverages and terms are market in the location area. A restauranteur should pay close attention to liquor liability insurance requirements and if business interruption insurance is required (this has become more common since the Covid-19 Pandemic).

Bottom Line for Restauranters

Securing a well-vetted and effectively negotiated lease agreement can be the difference in whether a restaurant is a financial success. The list above is just a small sample of the variety of different terms and concepts with which restaurateurs must contend when considering whether to lease. 

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Land lease definition

• Pros and cons

Can I get a mortgage on a land lease property?

What is a land lease.

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• Buying a home on leased land can be more affordable than traditional homeownership.
• With a land lease property, you'll own the home but not the land it sits on.
• There are additional costs associated with land leases, including rent and HOA fees.

With a typical home purchase, you own both the house as well as the land it sits on. But if traditional homeownership isn't right for your budget, you do have other options beyond renting. 

If you're considering buying a home with a land lease agreement attached to it, there are some things you should be aware of first. 

Similar to how an apartment lease enables you to live in an apartment owned by someone else, a land lease is a contract that allows a tenant to use a piece of land owned by a landlord. 

With these types of agreements, you'll own anything you put on the land, but not the land itself. Land leases are common in manufactured home communities, where residents own their manufactured home but pay rent for the land that it sits on. 

Land lease pros and cons

• Cost of homeownership is lower
• Pay less in property taxes
• Requires less maintenance from the homeowner
• May have homeowners association (HOA) amenities

The main benefit of owning a home on a land lease is that you'll pay a lot less to become a homeowner, since the land accounts for a significant chunk of the overall price in traditional home sales.

"The house is probably priced significantly lower than other properties on the market, giving you more bang for your buck when it comes to home size," says Dallas Waldon, a real estate investor and managing partner at Land Boss .

This will help keep your upfront and ongoing costs lower, since you won't need as large of a down payment and your monthly mortgage payment will reflect your smaller loan amount. You'll likely pay less in property taxes, too.

Additionally, because you don't own the land, you typically won't be responsible for its upkeep. You may also get access to community benefits, like a shared pool.

"If it's part of a homeowners association (which many leased-land homes are), there are the benefits of maintenance and common areas with valuable amenities," Waldon says.

• It's challenging to get a mortgage for these properties
• Less home appreciation
• Uncertainty in future costs or ability to renew
• HOA fees or rent could be expensive

Buying a home on leased land can be difficult and risky.

First, if you don't have the cash to buy a home outright, you'll need to find a mortgage lender that will lend on one of these properties. But this will likely be challenging because of the risk they present to lenders (more on that in a minute).

You may also miss out on the same growth in value you'd get with a traditional property where you own both the land and the house that sits on it. 

"The land is an appreciating asset; improvements (buildings) generally are not," says Wendy Ross, a real estate agent and broker-owner of Veracity Real Estate Co. in Newport Beach, California.

You also need to consider how long the lease is set to last and how your costs could change over time. 

"If you plan on living there for 10 years, but the lease ends in four — will you have to surrender your home and improvements?" Waldon cautions. "It's important that you are completely comfortable with the terms of the lease and the purchase."

If you are able to renew your lease but your rent goes up, consider whether you'll be able to afford an increase in your monthly housing costs.

Many land lease communities have HOAs, which also come with associated fees. Though you initially get a discount in purchasing a home without buying the land, think about your overall, long-term costs when considering whether this homeownership arrangement is ultimately beneficial to you.

"If you do decide to purchase a house on leased land, obtaining financing can be difficult to say the least," says Waldon.

Many lenders don't want to lend on properties where the owner doesn't also own the land the home sits on because it can present problems for them if the borrower were to default on their mortgage, or if the lease ends and they lose the collateral to the mortgage.

"Most banks require a land lease to expire no less than 10 years beyond the loan term. So a 30-year loan would need another 40 years remaining on the lease," Ross says.

According to Ross, you can use flexible term lengths to your advantage if you're trying to get a mortgage on a property where the land lease expires before a typical 30-year mortgage would be paid off.

"For example, one could request a 21-year amortization term if the land lease expires in 31 years," she says. Amortization refers to the process of paying down a loan in regular installments over a set period of time.

Waldon says that your real estate agent may be able to help you find a lender that will work with land leases, but warns that these mortgages can be pricey.

"There is less competition on these loans, so while the price of the home might be lower, the financing terms might also be less favorable," Waldon says.

Land lease FAQs

Some of the main disadvantages of a land lease have to do with the fact that it can end up being expensive. You'll have the ongoing costs of paying rent and HOA fees, and these costs could increase over the years.

Some land lease communities are only available to those who are 55 years or older. These are sometimes sought out by retirees because of the amenities that come with many of these communities, which may include lawn maintenance or home repair.

A land lease fee refers to the monthly rent you'll pay to lease the land your home sits on when you have a land lease.

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