Protect Yourself When Withholding Consent to Assignment or Sublet

If your lease is like many we've seen, it probably says that you won't unreasonably withhold your consent to a tenant's assignment or sublet request. And to protect you from a tenant's lawsuit in which it claims that you unreasonably withheld your consent, your lease probably also limits the tenant's remedies if it wins such a lawsuit.

But this protection may not do a good enough job. It doesn't protect you from a lawsuit by a frustrated third party—such as a broker or a prospective assignee or subtenant—who watched from the sidelines as you withheld your consent to the assignment or sublet. As a result, the broker might sue you for its commission. Or the prospective assignee or prospective subtenant might sue you for a lost business opportunity.

Broker Sues Owner for Denying Consent to Sublet

Even if you win a third-party lawsuit, you waste time and money defending yourself.

For example, a prospective subtenant wanted to turn jewelry store space into a restaurant. The owner refused to consent to the sublet unless the prospective subtenant gave it a bond guaranteeing that the space would be restored to its original condition when the lease ended. Eventually, the proposed sublet fell through and the owner and tenant canceled the lease. The owner relet the space to another restaurant tenant, without requiring a bond. The broker sued the owner for its broker's commission, claiming that the owner had been unreasonable.

More than three years—and many legal fees—later, an Ohio appeals court ruled that the owner didn't owe the broker's commission. Since the owner had legitimate concerns about the prospective subtenant's ability to restore the space, its actions weren't unreasonable [Donald G. Culp Co. v. Reliable Stores Corp.].

Require Tenant to Indemnify You

Although you can't stop a frustrated third party from suing you, you can limit your costs if it does, says New York City attorney Jacob Bart. He recommends getting the tenant to agree in the lease to defend and reimburse—in legal terms, “indemnify”—you if you're sued by a third party.

The tenant should agree to indemnify you against any loss occurring from claims against you by a broker, prospective assignee, or subtenant if you deny consent to a proposed assignment or sublet, says Bart. And because some leases allow you to effectively block an assignment or sublet by exercising a recapture right, he recommends that you also have the tenant's indemnification apply to that situation. So if, because of a third party's lawsuit, you owe damages, attorney's fees, or incur other expenses, the tenant must cover your costs, he explains.

To get this indemnification, add the following language to your lease's assignment and subletting clause. CLLI0016

Model Lease Language

If Landlord shall withhold consent to any proposed assignment or sublet, [insert if applicable: or if Landlord shall exercise its Recapture Right under Clause (insert # of recapture clause) hereof], Tenant shall indemnify, defend, and hold Landlord harmless from and against any and all loss, liability, damages, costs, and expenses (including attorney's fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease.

CLLI Source

Jacob Bart, Esq.: Partner, Stroock & Stroock & Lavan LLP, 180 Maiden Ln., Ste. 3980, New York, NY 10038; (212) 806-5584; jbart@stroock.com.