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A lease assignment means that an existing tenant, also known as the assignor, has transferred its interest in a lease to a different tenant, the assignee. This is different from a sublease. In a sublease agreement, the original tenant acts as a landlord and allows a new tenant to use the property, but the original tenant remains liable. In an assignment, the assignor is usually released from liability and removed from the lease.
Lease assignments are more common in a commercial lease setting, but they are also legal for a residential lease. A lease assignment agreement is a formal and legally binding agreement transferring the assignor’s rights and obligations to the assignee. The landlord, or owner of the property, will want to make sure that the assignee is capable, financially and otherwise, of paying the costs and otherwise complying with the obligations of the lease or other rental agreement that’s in place with the assignor.
The parties to a lease assignment are the:
The parties should negotiate the agreement among themselves, but the assignor generally wants to be released from liability, and the assignee will take on the assignor’s responsibilities. Usually, but not always, the landlord is required to consent to the agreement. The landlord normally wants to review the assignee’s financials and confirm that the assignee can afford to pay rent and take on the other obligations under the lease. In certain circumstances, the landlord may not be required to consent, for example, when the assignor is acquired by a different company. The lease may be assigned to the new owner, as part of the business operations. The assignee will be taking over the lease obligation from the assignee, including all of the liability, financial and otherwise.
The assignee will replace the assignor under the lease, so the relationship between landlord and assignor is dissolved, and the landlord-assignee becomes a landlord-tenant relationship. Under certain circumstances, the assignor may remain liable- for example, environmental indemnifications, unpaid amounts, or other obligations that the assignee is not willing to take on as part of the transfer.
The parties need to negotiate closely and confirm what rights, if any, are being transferred or retained. Using a template may (or may not) be thorough enough to cover all of these changing factors, and an attorney can be really expensive. Legal apps combine the best of both worlds: the protection and guidance of a law firm through guided logic, but the affordability and convenience of a downloadable template.
Tenants shouldn’t just switch places on a handshake basis - the original lease usually has the terms and conditions under which an assignor's interest, rights and responsibilities can be assigned to an assignee, and the landlord usually needs to consent. After all, the landlord needs to know who is actually using the property.
If the assignment isn’t done properly, then the landlord could initiate legal proceedings against assignor and assignee for violations of the lease, and the law, and will most likely win. The lease assignment agreement will clearly spell out what liabilities (if any) the assignor is retaining and what liabilities the assignee is taking on, and the landlord will consent to the transferring of such liabilities.
If not done correctly, then the lease may allow the landlord to void the assignment and to proceed against the assignor for lease violations and against the assignee for trespass, among other charges.
While lease assignments are more common in a commercial than a residential setting, they can happen in both types of property. For both types of leases, the parties should read the original lease and review the provisions regarding:
For residential property, this process is more rare. Specifically:
For commercial property, the landlord will at a minimum review the following factors:
A commercial tenant may not need to get the landlord’s consent at all to effect the assignment of lease. Most leases will have an exception for a corporate transfer (usually defined as a corporate sale or the sale of a controlling interest in the stock or the tenant’s majority assets) to a related entity. Therefore, a merger or acquisition may be an exception to the rule that the landlord’s consent is required. The landlord may be entitled to notice of the transfer within a certain period of time either before or after the transfer happens, and those deadlines are important.
While lease assignment agreements will vary based on the individual circumstances and the governing law, there are a few clauses that will show up in virtually every lease assignment agreement (especially a commercial one), and the parties should be prepared to negotiate accordingly:
Many states have passed legislation that prohibits landlords from withholding consent due to a lack of additional economic benefit. This means the landlord cannot condition its consent on receiving additional money, although the landlord does not have to agree to receive less rent as a condition of consent to a lease assignment.
Therefore, many leases require at least the rent under the then-current lease to be paid, and if there is an economic benefit to the assignor, then the landlord wants part of that additional amount. It’s recommended that the assignor recover its own costs before having to share any additional or excess profit with the landlord.
Most leases will require the assignor to reimburse the landlord for legal and administrative expenses incurred in reviewing the request for consent and document preparation fees. Ideally, the parties involved will have negotiated the fee, and it will be included in the original lease agreement. The assignor may negotiate to pass on some or all of the landlord’s fees to the assignee, as well.
In the event that the assignor wishes to assign the lease to another tenant instead of consenting, the landlord may terminate the existing lease and recapture the property in order to turn around and enter a new direct lease with the assignee. This is more common if the landlord wants to increase the amount of rent it will receive or in the event that the use of the property has changed.
The commercial tenant should include a lease provision that if the landlord attempts to recapture the property before a complete transfer, the request for assignment can be rescinded. Then the parties can consider other options, such as subleasing.
Does the assignor remain responsible after the effective date of the contract or is the assignee assuming all liability? The parties must review the lease assignment and confirm if the assignor retains liability for any damages due to its actions or omissions.
Alternatively, the assignee may take on the assignor’s liability, usually as part of the negotiations regarding funding or other considerations. The key here is for the assignee to know the full extent of the liabilities it is taking on, so due diligence is paramount.
All of the parties will want to know what they are getting, The landlord wants a new tenant who will pay rent and abide by the lease; the assignor wants to be released from liability; the assignee wants to have all the rights to use and occupy the property and become the lawful and sole owner of the lease. The landlord will rarely agree to absorb any costs it can pass on to the tenants. That means that if there is liability, responsibility for it needs to be negotiated between the assignor and assignee. For example, if the assignor knows about deferred maintenance, accrued rents, late rent payments, or other outstanding obligations, then the assignor is responsible for it unless the assignee takes on that responsibility.
The assignee may just really want the property and be willing to absorb the costs, especially if they are nominal, or the assignor may agree to reimburse or otherwise pay the assignee to do whatever the assignor has left undone. This clause should be negotiated carefully - whatever the parties agree to will be enforceable, absent fraud or misrepresentation.
All contracts, including lease assignments, require valuable consideration, which means one party pays a price in exchange for the terms of the contract. In a lease assignment context, that usually means that the assignee will agree to take on the liability of paying rent (and potentially other negotiated liabilities) in return for having complete control of the property and removing the assignor from the lease. The assignee wants the property in which to operate or live, and the assignor does not want to occupy the property anymore, and that’s usually considered sufficient for contract purposes.
The assignor and assignee should budget not only for their own legal costs but to cover the costs of the landlord as well. The landlord has to invest resources in reviewing the assignment of lease, reviewing related documents, and investigating the suitability of the assignee. Most savvy landlords will not want to be out of pocket for these expenses and will require payment or reimbursement in order to perform these actions. As to who will actually pay the costs - well, that’s a negotiation between the assignor and assignee.
If the parties and the premises are all located in different places, then what rules control in resolving disputes? Most parties will agree to the jurisdiction where the premises are located, even if the business itself or the property owner are located in different states.
For commercial leases, this can be negotiated, but residential leases are virtually always subject to the law where the property is located, no matter where the owner lives. The jurisdictional limits are likely clearly stated in the original lease, especially if it is not the location where the property is. It can specify the state, as well as the county and even the court of jurisdiction, and there may be key differences as to what is enforceable.
Lease assignment agreement disputes usually occur when the parties don’t have an agreement tailored to their transaction. It’s usually fairly simple to identify the business terms of a lease assignment, but it can get a little trickier when determining non-business terms, such as indemnification and liability. It makes sense to invest in a lease assignment agreement that has been reviewed by someone with legal knowledge.
The parties can best protect themselves by performing their due diligence - reading the lease and miscellaneous provisions and understanding what rights and obligations each party has under the lease, any continuing liability with respect to the real property, and what the assignee agrees to.
Then the assignor and assignee need to agree if the assignee is taking on all of the liability, which is typical, or if there are items that need to be specifically excluded or otherwise negotiated.
Finally, the parties need to approach the landlord with their agreement, ask for the landlord to consent to the assignment and be prepared to provide proof of financial capabilities. If these steps are followed and documented properly, the chances of a lease assignment dispute, and accompanying litigation, are far reduced.
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