Carl Kanowsky | Five Crucial Commercial Lease Issues, Part IV

Carl Kanowsky

Quick recap. Sam Johnson (purveyor of big cats and craft beer) has found the perfect place for his unique venture, “Growlers – Felines & Ale.” There you can find jaguars dripping blood while sipping a delightful malted beverage (that’s you drinking the brew, not the jag). What a combo! 

But I’ve cautioned Sam about jumping on a location based simply on price and location. There are a number of other issues to consider. Of the other issues, so far we have covered 1) Exclusivity; 2) Use of the property, and 3) Renewal of the lease. The next topic is Assignments. 

Now, let’s begin this discussion by distinguishing assignments from subleases. 

In a sublease, the tenant (in this case, Sam) rents out some or all of the property that the tenant is leasing for some or all of the remaining time left in the lease. This new renter, called either a subtenant or a sublessee, negotiates with Sam three things: A) how much the rent is for the subtenant; B) what portion of the property is the subtenant getting; and, C) how long the sublease will last. Generally, the landlord has the final say-so as to whether there will be a sublease and if the proposed subtenant is acceptable. Assuming the landlord approves, then the subtenant moves in and pays rent to Sam. Sam continues to pay the landlord the rent Sam agreed to in the master lease. If the subtenant fails to pay rent or breaches the sublease, it is up to Sam to kick him out. Sam would remain responsible for the rent payments regardless of whether the subtenant makes or misses any payments of rent to Sam.  

An assignment works differently. In an assignment, the original tenant vacates the premises, and a new tenant replaces the original one. In the case of Sam’s Growlers – Felines & Ale, it would mean Sam is gone and the new tenant takes over. A common scenario would be where Sam sells his business, letting the proud new owner of the big cats and the brewery take over. In other words, one tenant taking over for another, something often covered in most leases. 

An open question can be whether Sam remains liable for anything under the lease if the new tenant screws up. Under many leases, not only does the landlord have absolute discretion as to whether to accept or reject the new tenant, but in addition, the lease can provide that the landlord can demand a hefty fee to consider the assignment. Also, for many landlords, an assignment is a gift from the heavens. The landlord can move out a questionable tenant and bring in a stronger one. Additionally, the landlord can hold both Sam and the new tenant responsible for all aspects of the lease. So, if the new tenant misses rent, the landlord can demand payment from Sam, who has moved on with his business. 

That is why negotiating assignments is so important. Landlords often resist any release of the original tenant when there is an assignment. If the tenant fails to address this issue before he/she/it signs the lease, then they are generally stuck with the language keeping them on the hook for the lease even if they have found a suitable replacement. 

So, we are going to tell the landlord that, if he really wants you as a tenant, then the assignment language is open for discussion. 

Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at [email protected]. His column represents his own views, and not necessarily those of The Signal. Nothing contained herein shall be or is intended to be construed as providing legal advice.

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