Assignment and Subletting

January 2014

The assignment and subletting provisions of a lease can often be heavily negotiated, and there are many issues to consider. From a tenant’s perspective, there is the desire to obtain maximum flexibility with respect to assignment and subletting rights so that the tenant will be able to get out of a space that is either too big or too small, or simply no longer of any use to the tenant. Landlords, on the other hand, want to maintain control over who leases their space.  Below is part one of a two-part article on the basics of assignment and subletting.

In many situations, the parties will agree that the tenant has the right to assign or sublet to an affiliated party (for example, to a parent or subsidiary of tenant, or to another entity in connection with a merger or consolidation with tenant) without the landlord’s consent; and with respect to any assignment or sublease to an unrelated third party, the landlord will be reasonable in determining whether the proposed assignee or subtenant is acceptable. Leases often contain a list of various factors that the parties have agreed the landlord can take into consideration with respect to whether or not the landlord will consent to such a third party transfer, such as:

  • The proposed assignee or subtenant will not violate any use restrictions in the lease or any exclusives that have been granted to other tenants in the project.
  • The net worth or financial standing of the proposed assignee or subtenant is not less than that of the tenant.  Alternatively, sometimes the parties will agree upon a certain minimum dollar amount for the proposed assignee’s or subtenant’s net worth.
  • In a retail setting, the landlord will often want to be able to decide whether the proposed assignee or subtenant fits within the tenant mix of the project.
  • The proposed assignee or subtenant will be comparable to the tenant or other tenants in the project in terms of quality, business knowledge and experience, and/or reputation.

In California, a list like the one above is presumed to be reasonable when expressly stated in the lease pursuant to Section 1951.4 of the Civil Code. Because of this, some leases contain lists that run over twenty factors long. In addition, the same law provides an extra incentive for landlords to agree to be reasonable with respect to a tenant’s assignment and subletting rights – a landlord has the right, after the tenant has defaulted under the lease, to sue the tenant for rent as it becomes due, without placing any duty to mitigate damages on the landlord. This right is only available, however, if (a) the lease expressly gives the landlord such remedy, and (b) the landlord agrees to use reasonable discretion for proposed assignments or subleases. If the landlord maintained its right to give or withhold its consent in its sole discretion, then the landlord forfeits its rights under 1951.4.