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What You Should Know About Negotiating Assignment Clauses

If you are considering leasing space for your business or you are a property owner considering renting out your space, you need to carefully consider the terms of the lease you will be signing. One provision that is important but that often gets overlooked in the negotiations process is the assignment clause. There are some important things you should consider before agreeing to the assignment clause in any commercial lease. Keeping these important issues in mind can save you from a world of headaches in the future.

What is a Lease Assignment and How is it Governed?

Lease assignments are governed by California statute and the actual language of the lease. A lease assignment is a transfer of a lease by the lessee (the renter) to a third party. Because the third party that a lessee may wish to assign the lease to may not be a tenant the landlord would want to enter a rental agreement with, leases often contain limitations on assignment rights.

Issues Commercial Tenants Should Be Concerned About

The tenant in a commercial lease, or the lessee, generally prefers an assignment clause that is as flexible as possible. This is especially true in cases where the lease covers an extended period of time. These lessees may not know going into the lease that their business’s needs will be met by the rented property for the entirety of the lease term. If the property eventually does not need the business’s needs, the business may need to relocate, but in order to do so, it may need to assign its lease to come other company. Similarly, if the lessee faces a financial hardship during the term of the lease, it may wish to assign the lease in order to decrease its business expenses by subletting just a portion of the space rented. In order to be clear as to what sort of assignments are allowed, tenants may wish to request that a list of explicitly permitted types of assignments be included in the lease. They should also negotiate as to how the profits of any of these approved assignments will be shared between the lessee and the landlord.

Issues Commercial Landlords Should Be Concerned About

The landlord’s primary concerns in negotiating these clauses is that they ensure that a business with enough income to pay the rent is renting the space. Additionally, the landlord does not want the lessee to become a competitor who undercuts the landlord’s ability to lease other similar property. In order to make sure that these needs are met, landlords should draft clauses that prohibit assignments that would contravene these purposes. They must be careful to include prohibitions against not only assignments and subleases that would contravene these goals, but also prohibitions against assignments of portions of the property covered by the lease, shared occupancy agreements, and sub-subleases. Landlords will also ideally draft clauses that ensure that the original tenant remains liable under the lease after an assignment is made.