Provision on assignment—A critical part of any commercial lease negotiation

In commercial lease negotiations, few subjects besides principal economic issues are more important, or get more attention, than the provision on assignment. From the landlord's perspective, the tenant should be given limited, if any, rights of assignment. Conversely, a tenant wants assignment rights in the lease to be as broad as possible. And so the negotiations begin. How they proceed and how this issue is dealt with in drafting the lease can have significant consequences for landlord and tenant. This article summarizes the general rules governing assignment in the commercial lease setting in New York with an emphasis on landlord's right to consent to an assignment, whether the landlord is required to be reasonable in giving or withholding such consent and how the courts in New York generally define what it means to be "reasonable" in this context. For the purposes of this article, the issue of "subletting" is subsumed under the general topic of assignment. The first part of this article covers the topic of assignment generally. The second part, to be published in a subsequent issue, covers the issue of "reasonableness" in the context of obtaining landlord's consent to assignment and provides considerations for landlords and tenants concerning the issue of assignment. Assignment is a broad topic affecting issues beyond the mere right to transfer tenant's leasehold interests, including mergers and acquisitions. How assignment is dealt with in the lease can have serious impacts on the ability, particularly of the transferring party, to successfully complete those kinds of transactions. Those subjects extend beyond the reach of this article, but it's important to be generally aware of their importance and consider these types of possible future events when negotiating assignment. Key drivers of assignment rights in a commercial lease From the tenant's perspective, particularly with a long-term lease, the ability to assign is critical in guarding against the consequences of a less-then-successful business location, as it carries with it an opportunity to be relieved of continuing rental obligations. But that is not the only reason tenants argue for broad rights of assignment. Embodied in those rights is the ability for the tenant to profit financially on the lease, especially if the tenant has renewal options from the landlord (because time is money) and where the lease is considered to be below market (like many leases signed shortly after the recent financial crisis). From the landlord's viewpoint, nothing is more of an anathema than a tenant profiting on his lease. An oft heard response to the tenant's request for broader assignment rights during negotiations is "I'm not putting you in the real estate business." Apart from the fact that landlords uniformly believe only they should profit from their real estate, there are other legitimate landlord concerns associated with granting a tenant broad rights of assignment. In the shopping center context, for example, where tenant mix is critical to the center's success, it is important for the landlord to build protections into the lease to guard against a tenancy that doesn't fit into the mix or conflicts with an existing tenancy. In any case where landlord has negotiated a lease with a strong credit tenant, the last thing he wants to see is his rent stream and financeability jeopardized by the replacement of that strong tenant with another lacking financial strength. The law of property, by itself, does not favor either tenant or landlord in this regard, whether they are purely profit driven or not. When property is leased, the landlord is said to be granting the tenant an "estate" in that property. That grant provides all the rights associated with that estate, including the right to "alienate" or transfer that estate to another. Theoretically, if the parties were to sign a lease without addressing assignment, under New York law the tenant would have the right to assign the lease. `In the real world, landlords are certain to address this, often by trying to place an outright prohibition against assignment or by providing for a right of termination in landlord's favor in the event tenant proposes an assignment. Another typical approach would be to provide in the lease that tenant's right to assign is subject to first obtaining landlord consent. If that is all the lease provides on the subject, unless the right of landlord to give or withhold consent is further qualified, the landlord may refuse consent for any reason, arbitrary, capricious or otherwise. Unlike some other jurisdictions, there is no obligation on the landlord to act reasonably in giving consent in New York, and New York courts cannot be relied upon to rewrite the agreement of the parties to imply such a standard. Bernie Kennedy is a co-managing member (partner) at Bond, Schoeneck & King, Garden City, N.Y.