Our firm is often involved in landlord-tenant situations involving assignments of commercial leases. What this means is that one party to a commercial lease (usually the tenant) wishes to transfer their rights and responsibilities to a third party, either an individual or company who is not a party to the original lease. Most often this occurs when there is a potential sale of the business associated with the lease.
For example, a commercial tenant operates a car repair business and has a lease for the business for a period of five years. A third party approaches the business owner and offers to buy the business. As part of the purchase, the lease needs to be assigned from the current tenant to the purchaser of the business.
The main legal issue relates to the lease itself. Most, but not all, commercial leases contain a clause allowing assignment of the lease to a third party with the consent of the landlord. They may also state that such consent is not to be unreasonably withheld or delayed. Some leases will further delineate what “unreasonable” may entail. For example, it may state that it is not reasonable to refuse consent to a purchaser who intends to operate the same type of business as the current tenant, assuming they have the financial standing to assume the lease.
As a part of the assignment process, the landlord may reasonably request financial information from the potential assignee, such as individual and business tax returns, or profit and loss statements. Some leases even have detailed provisions listing the specific documents to be delivered to the landlord from a potential assignee. Upon receiving such information, the landlord should then advise the tenant whether an assignment will be approved.
The first step is to have counsel review the lease to determine what the tenant’s rights are regarding assignment. If the lease allows for assignment with consent of the landlord, it is prudent to make such a request to the landlord in writing, including all documents referenced in the lease. Many potential deals for sale of a business will necessarily include the premises in which the business is located. For this reason, obtaining the consent of the landlord for an assignment is an essential component of the sale of a business. If the landlord does not consent, then the purchase may not go forward.
Assuming the landlord does consent to an assignment, it is important for the assignee have counsel review the lease in question. In an assignment, the assignee will assume all of the lease obligations of the original tenant. The new tenant should examine the premises to ensure it is in good condition, as any damages caused by the original tenant will become the responsibility of the new tenant after assignment.
Another issue that will arise in a commercial lease assignment is the payment of the rent and security deposit. Most landlords will not allow an assignment if the current tenant is in arrears in their rent payments. All rent payments should be made current before an assignment is finalized. In addition, the original tenant most likely will have given a security deposit of one or more months rent to the landlord. The parties to the assignment transaction should agree whether this security deposit will be transferred to the account of the new tenant. If it is, the parties may choose to modify their business agreement to account for these funds being transferred.
Weiss & Weiss has experience in reviewing commercial leases and effectuating assignments of same when necessary, and welcomes all inquiries in this area.