Draft Airtight Assignment Clause for Shopping Center Space

Most leases contain an assignment clause that requires tenants to get your consent before they may assign their leases. But some leases contain a loophole that risks giving the tenant too broad a right and being forced later to rent space to a tenant that isn’t appropriate for your shopping center--despite painstaking efforts to create optimal tenant synergy there. If your consent doesn’t include certain conditions, your efforts might be in vain.

With the help of New York City attorney A. Barry Levine, the Insider’s December 2013 issue showed you how to tailor an assignment clause to an office building tenant’s lease. Consider the following assignment clause issues that pertain to shopping center leases and ask your attorney about adapting our Model Lease Clause: Set Conditions for Assignment of Retail Space, to make your assignment clause restrictive enough to protect your interests at your center, but also fair to your retail tenants. After all, your bottom line depends on your tenants’ success at the center, so it’s in everyone’s best interests for a tenant that’s not turning a profit to find an appropriate replacement that will.

Limit Assignment Without Consent

You may want to allow the tenant to assign without your consent in certain instances—such as assigning the lease to a “related party.” If that’s the case, you should carefully list these instances and define any terms that could be confusing, such as “related party” [Clause, par. 1(a)].

Be aware that a tenant that has a totally unfettered assignment right and is desperate to replace itself quickly at your center might resort to producing a tenant that’s unsuitable for any number of reasons. One of the most important aspects of any center is the mix of tenants that lease space there. Good tenant synergy can sometimes make or break a center. So a tenant’s designated “use” of its space is crucial. It’s justifiable for you to specify that an assignment without your consent must be to a tenant whose proposed use does not violate an existing exclusive at the center [Clause, par. 1(a)(iii)]. You can also require that the tenant be operating in its premises consistent with the terms of its lease in order for it to exercise its assignment rights.

Make Consent ‘Reasonable’

An owner is justified in being very leery about who its tenant may be in the future if it’s easy for current tenants to assign their leases, says Levine. Most tenants understand an owner’s hesitation to let simply any assignee into the center, but they’ll still want you to be reasonable when determining whether you’ll consent to a proposed assignment, he adds.

“Reasonableness,” however, means different things to different people, Levine points out. That’s why owners should go into detail as to what is reasonable and what isn’t when drafting the lease. Specify in the lease that “consent will not be unreasonably withheld” [Clause, par. 1(b)]. But be prepared to explain what items are unreasonable—for example, a change of use. Otherwise, a judge will have to make that decision later if there’s a lawsuit and what’s reasonable and unreasonable hasn’t been specified, Levine warns. You can also include a time period, such as 15 business days, within which you must approve or deny the tenant’s request.

Set ‘Reasonable’ Conditions

These are commonly included, “reasonable” conditions in an assignment for retail space:

Limited release of liability. “A tenant should rarely be released in the event of an assignment,” says Levine. The tenant should stay liable because, after all, it’s producing the assignee that you’ll look to for rent and it should have to stand behind that assignee, he points out. If you can’t get rent from the assignee, you’ll be able to turn to the tenant if you haven’t released it.

Owners wouldn’t ordinarily want to have the lease contain a “release of liability” clause, but for tenants with a lot of leverage, you could consider using one that provides for the condition that the assignee must be worth in excess of a very large amount of money, say, $100 million, says Levine [Clause, par. 2].

The tenant still should be responsible for its other lease obligations and liabilities after the assignment takes effect. You don’t want to have to argue with a tenant that later claims your consent to the assignment released it from its obligations and liabilities.

Tenant provides key documentation. The owner should get copies of important documents, including all financial reports of the assignee. It should also get a fully executed copy of the assignment agreement delivered within five days following its execution [Clause, par. 1(b)]. In certain instances, you may also want to insist upon an affidavit from the assignor that it’s a true copy of the agreement, says Levine.

Use must stay the same. The use can’t change, and the assignee’s use must not violate any current exclusives that other tenants at the center may have, says Levine [Clause, par. 1(a)(iii)]. In addition to the assignment clause, he also tries to be specific in the lease’s use clause. Instead of saying that the space is simply for “retail use,” name the type of use, such as “the sale of women’s clothing.”

Practical Pointer: You can draft your use clause to help you with assignments that could be troublesome, such as a tenant’s proposed assignment to a business that would create noise complaints or create wear and tear in the parking lot, like a busy restaurant with high turnover, that wasn’t contemplated by the owner. A savvy owner would mention traffic in the assignment clause, suggests Levine.

Tenant must not be in default. At the time the tenant requests your consent to an assignment it mustn’t be in default under the lease [Clause, par. 1(a)].

Assignee must assume lease terms. You can say that the assignment is on same terms as the lease by stating that “any such assignee or subtenant shall be bound by the terms of this Lease, except as otherwise approved by Landlord” [Clause, par. 1(c)]. And set out the requirement that the tenant must deliver to you its assignment agreement with the assignee that states it agrees to be bound by the terms of the lease.

Remember that the rental rate should stay the same. The tenant also shouldn’t be able to charge rent that’s lower than what you’re currently asking for other space in the center.

‘Take Back’ Right Creates Win-Win Situation

Including a provision in your shopping center assignment clause providing that you can “take back” the space is advantageous, says Levine. “The ‘take back’ provision usually works because, after all, if the tenant wants to get out of its space, for whatever reason, and the owner believes it can readily rent the space, why not allow the owner to take back the space?” he asks. “Both parties get what they want: The tenant is off the hook and you control who your new tenant will be and the other terms of the lease—a win-win situation,” he notes.

To do this, first require that a tenant that wants to assign its lease, or use the space for a “use” not related primarily to the permitted use, send a written notice—that is, an assignment agreement that it wants to solicit offers for an assignment [Clause, par. 3]. Give yourself ample time, say, 21 days—your “recapture period”—to decide whether you’ll terminate the lease by sending a “takeback notice” to the tenant and take back the space. (The tenant shouldn’t be allowed to assign the space during the recapture period.) The takeback notice should set out the following:

• When the lease will end if you exercise your option to terminate the lease, typically not less than 30 days or more than 60 days after the date of the takeback notice;
• Rent will be apportioned as of the early termination date; and
• If the tenant doesn’t receive a takeback notice within the recapture period, then you’ll be deemed to have waived your recapture right and the tenant will be entitled to assign the lease during the one-year period (the tenant’s transfer period) following the expiration of your recapture period, subject to the terms of the assignment clause.

Include Protections for Assignment

Your assignment clause should include some additional protections. And those can work in both the tenant’s and your favor. Again, the idea behind the assignment is to get a viable tenant for the space if the original tenant no longer can, or wants, to meet its obligation. In furtherance of getting the win-win situation, think about putting these protections in the clause:

Effective notice. Once the assignment has been completed, you may at some point have to send notices if there’s an issue with the assignee or there are problems that need to be cured—that is, fixed. Specify in the assignment clause where and to whom the notices should be sent. That should include the original tenant. Say that when giving notice to the assignee regarding a default, you’ll also give a copy of such notice to the tenant—and that no notice of default would be effective until that copy is given to the tenant. Additionally, give the tenant the same period after it receives the notice to cure the default as you give to the assignee [Clause, par. 4(a)].

“New lease” right. The protections in your assignment clause should cover what happens in the event that the lease is terminated either because there is a default by the assignee or it becomes bankrupt. You could agree that, if the tenant hasn’t been released from all liability under the lease, it has the right, which must be exercised by giving notice to you within a certain period of time—say, within 15 days after it receives your notice—to enter into a new lease for the space. But make sure that the tenant gets this right only if it has remedied the assignee’s default. (You could make an exception in the case where the default can’t reasonably be cured by the tenant.) The tenant would be subject to the same terms as the assignee. You may want to end this “new lease” at the end of the term of the original lease—including any renewal periods [Clause, par. 4(b)].

Future assignees/subtenants. Make sure that any future assignees or subtenants that the original tenant proposes for the space are extremely creditworthy, with a high certified net worth. Like the assignee, they should also be bound by all of the same terms of the lease [Clause, par. 4(c)].

Should You Share Profits or Split Costs?

When it comes to profits that may be realized from an assignment, an owner could offer to share the profits with the tenant, or it could recoup all of the profits. You could offer to split any profits above the base rent. In some cases, however, if the market is bad and the tenant has to get out, it may be willing to lose a few dollars per square foot by charging the assignee less than it owes. Keep in mind that you shouldn’t lose any money on an assignment; any costs involved in the assignment should be paid by the tenant, including attorney’s fees.

In the same vein as having the tenant absorb all costs of an assignment, you shouldn’t have to pay for increased services for the assignee. But an assignee that wants additional services that the tenant doesn’t require isn’t a reason by itself to deny an otherwise eligible assignee, says Levine. Extra HVAC or weekend lighting fall under the category of things that the assignee will have to agree to pay for itself. Levine notes that these services have the potential to make money for owners, so don’t immediately dismiss the idea.

Insider Source

A. Barry Levine, Esq.: 320 East 23rd Street, New York, NY 10010.