Limit Permitted Assignments/Sublets to Tenant Affiliates

A tenant may demand the right in the lease to assign its lease or sublet its space to an affiliate—that is, a company the tenant controls or that controls the tenant—without your consent. The tenant may argue that an assignment or a sublet to an affiliate is just a change in form, not substance, since they're related companies. If the tenant is strong, you may have to give in to its demand.

But if your lease is like many we've seen, it may contain a loophole: Nothing may prevent the affiliated assignee or subtenant from then assigning or subletting, without your consent, to a party that's not an affiliate of the original tenant. So you could be powerless to bar an assignee or subtenant that upsets your tenant mix or your other tenants, or that might be financially unstable.

With the help of Ohio attorney Abraham Lieberman, we'll give you a hardball strategy and a compromise strategy that you can use to plug this loophole. There's a Model Lease Clause on p. 9 that you can adapt and use for both strategies.

Hardball Strategy: Allow Only Original Tenant to Assign or Sublet Without Consent

Start off your negotiations with the tenant with the hardball strategy, says Lieberman. A hardball clause, like our Model Lease Clause, should cover the following three points:

Limit perk to original tenant. Say that only the original tenant may assign or sublet to its affiliate without your consent, says Lieberman [Clause, par. a]. This means that neither an assignee nor a subtenant can take advantage of this perk, he explains. Define “original tenant” to mean the original party who signed the lease as the tenant [Clause, par. b(i)].

Narrowly define “affiliate.” Define “affiliate” to require it to be a company related to the original tenant, says Lieberman. For example, say in the clause that a company can be considered an affiliate only if:

• The majority owners of the affiliate are the majority owners of the original tenant;

• The affiliate is a majority owner of the original tenant;

• The original tenant is a majority owner of the affiliate; or

• The affiliate results from a merger or consolidation of the original tenant with another entity [Clause, par. b(ii)].

Insert extra clarification. As an extra clarification, say that nothing in the clause should be interpreted, or deemed, to permit an assignee or a subtenant to further assign or sublet to any third party without your consent, says Lieberman [Clause, par. c]. This avoids any ambiguity over whether the assignee or subtenant may take advantage of this perk, he explains.

Compromise Strategy: Allow Assignment/Sublet Without Consent to Affiliates of Original Tenant

A tenant may balk at this hardball strategy, says Lieberman. It may argue that the lease will be less attractive to prospective assignees and subtenants if they won't get the perk of further assigning or subletting to an affiliate without your consent, he explains. If the tenant is strong, you may have to back down. If so, try this compromise instead, says Lieberman: Give the tenant, its assignees, and subtenants the right to assign the lease or sublet the space without your consent, but allow the assignment/ sublet only to an affiliate of the original tenant. This way, the assignee and subtenant has some ability to assign or sublet without your consent, he says. It's just that you've narrowed the list of eligible affiliates.

To use the compromise strategy, say in the clause that the tenant, its assignees, and subtenants all get the right to assign or sublet without your consent to the tenant's affiliate, says Lieberman. Keep the narrow definition of affiliate. But delete the extra clarification concerning deemed permission.

CLLI Source

Abraham Lieberman, Esq.: Member, Baumgartner & O'Toole, 582 Leavitt Rd., Amherst, OH 44001; (440) 244-1212.