Navigating Commercial Lease Assignment Provisions: Tenants Beware

Landlords use lease assignment provisions to maintain control over the quality, composition, and financial capability of their tenants. However, assignment provisions can have a chilling effect on a corporate tenant's business operations and ownership structure. In this article, we explore the various pitfalls that corporate tenants should avoid when negotiating and drafting assignment provisions in commercial leases.

Most assignment provisions in commercial leases restrict two types of circumstances. The first is the proposed assignment of a lease to an unrelated third party or to an affiliate company of a corporate tenant. The second is the deemed assignment of the lease by operation of a change in control or ownership of a corporate tenant.

As a general rule, in the absence of a specific provision in a commercial lease restricting assignment, a tenant is free to assign its lease to a third party without notifying the landlord or obtaining the landlord's prior approval. However, most modern commercial leases contain assignment provisions that either prohibit or restrict the circumstances under which a tenant may make an assignment of its lease. Provisions that restrict assignments require tenants to obtain the landlord's prior consent to an assignment of the lease. Courts in New York State have consistently held that if an assignment is conditioned upon the landlord's prior consent, the landlord may arbitrarily withhold its consent to the assignment unless the lease states to the contrary.1 To prevent a landlord from arbitrarily withholding its consent to a lease assignment, a tenant should negotiate and include a provision that states that the landlord shall not “unreasonably withhold, condition, or delay its consent” to a proposed assignment.

Even in those instances where a commercial lease assignment provision prohibits the landlord from unreasonably withholding its consent to a proposed assignment, the landlord's consent will generally still be conditioned upon the satisfaction of certain conditions. These conditions typically include, but are not limited to, information regarding the proposed assignee and its use of the premises, copies of the proposed assignee's financial statements, the payment of additional rent or security if the landlord approves the assignment, execution of an assignment and assumption agreement by the proposed assignee, and payment of the landlord's attorney's fees in connection with document review...