Provision on assignment - A critical part of any commercial lease negotiation, Part II

Part I of this article (February 10, 2015) summarized the general rules governing assignment in the commercial lease setting in New York. This discussion focuses on the "reasonability" standard and provides suggestions for landlords and tenants considering the issue of assignment in lease negotiations. The typical commercial tenant will invariably insist that landlord include a provision requiring that consent to assign "not be unreasonably withheld." But what exactly is meant by this reasonability standard? No hard and fast rule defines what it means to be reasonable in this context in New York. However, what can be said for certain is that a landlord's decision to withhold consent, to be reasonable, must be based upon objective, measurable criteria such as financial responsibility, the suitability of the proposed use (if there is to be a change in use) and the nature of the occupancy, not subjective preferences. Foremost among the factors considered by the courts is whether the landlord will be reasonably assured that the covenants of the lease will be performed by the assignee. It is unlikely to be deemed unreasonable for a landlord to withhold consent if the proposed assignee has a record of financial difficulties or a limited history of operation in business. On the other hand, a court may find that a landlord has been reasonable in withholding consent for a use that is unsuitable for the building or duplicative of an existing use in the shopping center. Other examples would include a proposed use outside the proper mix of tenants for a certain building or shopping center, or one in conflict with an existing use in a shopping center. Landlord objections that have been found to be unreasonable in New York include opposition based solely on a tenant profiting from the assignment, or because the landlord simply disliked the proposed business itself. The bottom line is that any analysis about what is or is not reasonable will necessarily be fact driven. Consequently, it is not easy to predict with any degree of certainty whether a particular court will uphold a landlord's decision as reasonable or determine that it has been unreasonable in withholding consent. Two different judges can come to different conclusions on strikingly similar sets of facts. The drafting becomes particularly important. Better practice dictates providing objective criteria in the lease itself, particularly covering the important issues, like financial viability and suitability of use. Thoughts to consider in negotiating and drafting assignment provisions: Landlord * Always start from the position that assignments should be prohibited or subject to consent. * Negotiate a right of termination. If the lease is terminated, two major issues have been taken care of: The tenant is no longer responsible to pay rent and the tenant cannot profit from the assignment. * Define what the parties consider to be reasonable, anticipating likely scenarios and using objective criteria. For example: "For the avoidance of doubt, the parties expressly agree that it shall be deemed reasonable for the landlord to withhold its consent to any proposed assignment to any entity having a net worth less than $5 million." * If you want the right to withhold consent for specific types of uses for whatever reason (Eg: Religious, philosophical), and are otherwise willing to be subject to a "reasonableness" standard, then state specifically in the lease that the parties agree that it shall not be unreasonable for the landlord to withhold consent to those specific uses. * Make certain that the tenant agrees specifically in the lease that it may not assign for any so-called "prohibited uses" listed in the "use" provision. * If you are concerned about the tenant's profit motive, then negotiate the profit out of assignment in the lease itself, or at least have tenant agree to split the profit evenly. Tenant * Insist that a "reasonableness" standard be applied to landlord's right to consent. * Ask landlord to pre-approve certain uses for the purposes of assignment, anticipating those uses that will be least objectionable and giving tenant the greatest flexibility should assignment becomes necessary. * Use this specific language if possible: "The landlord agrees it shall not unreasonably withhold, condition or delay its consent..." While most courts are not likely to uphold the imposition of a condition to the granting of consent unless specifically provided for in the lease, it is worthwhile making that expressly clear. Add the "delay" language in anticipation of the landlord using a hyper technical defense claiming that "delaying" does not constitute "withholding" while your assignee moves on to another location. * On the profit issue, negotiate as large a split as possible, bearing in mind that your landlord will never agree to share in an overall loss you might incur at a location. Bernie Kennedy is a co-managing member (partner) at Bond, Schoeneck & King, Garden City, N.Y.