Here at Bongiovi Law Firm we focus on serving as outside general counsel for small to medium sized businesses. As part of that representation, I frequently review and negotiate commercial lease agreements for our clients, whether it be for retail, office, industrial, or medical space. As the previous sentence suggests, lease agreements can differ widely depending on the type of space you need. More on different lease types can be found here. Now, all commercial leases will have similar provisions, and, for the most part, those provisions are a convoluted mess and a dreadful bore to read, let alone comprehend. BUT, you’re in luck, because reviewing commercial lease agreements is my favorite part of what I do here! #weirdo
One section of lease agreements that most folks will sort of gloss over is their assignment rights as tenants. This section will typically be labeled Assignment and Subleasing, or something similar (this article focuses more on the assignment part). So, why should you give a hot hoot about some stupid assignment provisions? Mainly, because none of us can see into the future (if you can, let me know as there are some upcoming sporting events that I’d love to bet the farm on!). Let me explain with a (modified) real life example:
Company A is a thriving business that signed a seven year lease agreement without paying any attention to the assignment provisions. Year three of the lease rolls around and Company A is killing it. The owners decide it’s time to sell for top dollar and quickly find a suitable buyer. Good for them! Not so fast…a requirement of the sale is that the current lease must be assigned to the buyer as the new owner, which is very typical. So, what? Well, Company A didn’t bother to anticipate this possible scenario and address it up front, and the landlord refused to allow the assignment of the lease to the buyer, which completely blew the deal out of the water. We get a call from Company A, irate about the landlord killing their deal, asking how it is possible that they could legally do this. So, I have the honor of being the bearer of bad news, in telling the owner, “because your lease says they can.” You can imagine how that went over, much like a fart in church. In this case, the landlord had sole and absolute discretion as to whether or not Company A could assign its interest in the lease, which means the landlord could just say “no” without explanation or justification and that was that. Kind of like mom, “because I said so.”
-This doesn’t mean that you couldn’t get into a huge pissing match in court over it, but you can rest assured that doing so will be expensive, time-consuming, and an overall pain in the arse at very least-
While the above situation doesn’t happen every day, it illustrates my point that assignment rights are important and should absolutely be negotiated up front. Simply requesting the requirement that the landlord be reasonable when you make a request to assign your interest in the lease can save you a bunch of heartburn down the road.
Another thing a lot of folks don’t realize is that even if your landlord approves of the assignment of your lease to the purchaser (or someone else), your company, and very likely you personally, will remain on the hook for the rest of the lease term. Two suggestions there, especially where the sale of your business or its assets is even remotely conceivable: 1) request that you be released of any further liability or obligation under the lease (and personal guaranty) if you were to sell your company to a purchaser that the landlord reasonably approves; or 2) if the landlord tells you to kick rocks on the first option but still approves the assignment, it’s worth attempting to require the purchaser to indemnify you if the landlord were to come after you for any continuing obligations you may have under the lease (although, if the purchaser has no money to pay the rent, the chances they will have the scratch to indemnify you are pretty slim. But I suppose it’s better than nothing!).
Similar words of caution are applicable to many other provisions in commercial lease agreements. As such, it is paramount that, at a minimum, you understand what is put in front of you. This will allow you to make an informed decision on moving forward or walking away. Check out this article addressing other common pitfalls to be on the lookout for.
In my experience, most landlords are at least somewhat reasonable, and will typically work with tenants on a lot of requests. However, some landlords are not interested in making many, if any, revisions to their lease agreements, and it becomes more of a take it or leave it situation. Again, understanding what’s in the agreement will at least permit you to make the best decision possible for your business.
As always, we certainly suggest that you consult with an attorney to review and help negotiate your lease agreement. Please feel free to contact us with any questions or concerns related to commercial leases or purchases.