IMPORTANCE OF YOUR LEASE?
A commercial lease is nothing more than a contract for the use of certain described real property, and the improvements found on the property- per certain terms and conditions;
Can you have a brick and mortar presence in any business without a lease agreement?
More important vis location to some businesses vs others.
Depending upon the type of business you have, location can be everything- restaurants/ bars/ where you are identified with the location- goodwill re the same;
( where your business is located becomes a corner stone to its recognition- its book of business- its saleability to another at some point in time)
QUESTIONS AND ANSWERS—
Q- What do you call it when you transfer a lease agreement from one party to the next?—
So today we will briefly discuss transfers of leases, and some of the pitfalls-
A- An assignment of the lease—
Q- When someone assigns a lease to you, what has happened legally with regard to that property?
A: The rights and duties pertaining to that property have been assigned—i.e. transferred to you !!!!!!
Q- Does the landlord generally have to approve an assignment and or transfer of the lease?
A-(yes – see provisions-20.3-a scan doc that will be part of this blog article)
Q- If a landlord approves the assignment does that allow the transferring party to no longer be responsible under the terms of the lease?
A- ( eg if Marie sells her business , but has personally signed on the lease- and she assigns her lease as part of the sale- is she no longer responsible under the lease?)
A—she will usually still be liable-secondarily liable—
ADDITIONAL FACT (only true way out is to terminate the lease, or have an express release of you from the lease)
See provision 20.5
Q– Can there be multiple assignments of leases?
Q- What is the legal effect of a lease having been assigned multiple times, with consent but no release, when there is a default on the lease?
Q- Simplest type of default? Lack of payment of rent/ triple net expenses etc.
A– All parties in the assignment chain, are liable for the defaulted rent;
Story about the Laundromat owner, fifth time removed when he defaulted on the rent—suit by the landlord against all of the prior assignees;
Q- who wins?
A- LANDLORD AGAINST ALL PARTIES
Q- Does a landlord have to agree to an assignment?
Depends upon the language?
See example lease provision—20.3
A- Key language you want in your lease—consent- ‘which consent will not be unreasonably withheld’– Assignment needs to be approved and consented to , which consent will not be unreasonably withheld;
Q- What is unreasonably withholding consent? (usually need a comparable tenant-financial capability largest issue)
Request for information- see- provision- 20.4—
Q- What is the standard in most commercial leases for consent- A- proposed assignee/ transferee usually must be at least as substantial financially as the party leaving before consent will be granted;
Q- So, even if consent is granted , a release of the assigning party from the lease, still does not occur without an express release and or termination of that relationship by the landlord and the assigning party;
See provision 20.5—
OTHER ITEMS THAT COME WITH MANY ASSIGNMENTS-
The rent of the assignee is security for your obligations under the lease;
Transfers to 80% or more same ownership; ok- see provis 20.7
(assignments without approval ok)
Changes in entity ownership—ok if 49% or less;
(assignments which are ok-without approval)
Also, provisions to expect— Other little hooks in the assignment section—
20.9- assignment fee- always at least $500—but this language supported a $2500- fee;
20.10- And don’t plan on making a profit on your lease when you sell the business – b/c if you do- then 20.10 you will under this lease owe the landlord ½ of your profit;
So , you can see, how important a lease can be;
And you can see the assignment provisions are one of the most important sections;
However Caveat, as most 25-40 page leases have many other key provisions that need to be reviewed as well by both you and your legal advisors; we help many clients weave through these challenging lease agreement provisions;