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Strategy
Subleasing and assignment
An assignment is the transfer to a third party of all rights and interests the tenant holds under a lease. In a sublease, the transfer usually covers a portion of the leased space or the entire property for a period shorter than the lease term. If your lease says nothing about subleasing or assignments, you’re free to do either. Most landlords, however, are acutely aware of the profit potential this would give you. Usually they’re also concerned about controlling the character and quality of tenants in their buildings. Often the landlord’s lease flatly prohibits a tenant from assigning or subleasing its space. In a variation that is little better, a landlord will permit subleasing only with their consent, and they’ll agree to be "reasonable."
Subleasing. Flexibility could be crucial to your facility in a changing and competitive market environment. Unless you have a tiny space or short lease-term, negotiate for the right to sublease part of your space without the landlord’s approval. This allows you to warehouse unneeded space but gives you the option of easily regaining it from your subtenant.
If your lease requires the landlord’s consent before subleasing and says the landlord must be "reasonable," define what this means. Prospective subtenants probably won’t wait while you wrangle with the landlord over the terms under which you can sublease. The landlord’s rejection of prospective subtenants should be for limited, objective reasons, like financial inability to handle lease payments or bad reputation. Also limit the landlord’s time to decide on any proposed subtenant. A "yes" that comes too late will cost you a subtenant as surely as a "no."
Whether you’re required to turn over 100% of sublease profits or only a portion, define sublease profits to make sure your expenses are covered. You should be able to deduct from rents you receive any expenses like advertising, the cost of negotiating and drafting the lease, and concessions like free rent, carpeting and painting, as well as the unamortized cost of your own improvements in the subleased space. Negotiate, too, to deduct rent you pay while your space sits vacant as you try to sublease it. Agree to pay your landlord only when and if you’re paid. If your subtenant defaults, leaving you without a promised income stream, you don’t want to be obligated to pay illusory profit to your landlord.
Some landlords will insist on the right to take back space you want to sublease. This allows a landlord to regain space in a rising market and rent it out itself, perhaps negotiating a longer term with another tenant. If your lease contains a clause like this, make sure the landlord is limited to taking back only the space you want to sublease for the time you want to sublease it.
Assignment. Be especially wary of leases that flatly prohibit assignments or give your landlord unfettered discretion to prohibit one. In many cases, a merger or acquisition will result in an assignment because your lease is transferred to a new legal entity. This means you’d be in default and could be forced out – especially in a rising market. The landlord also may try to impose capitalization requirements on an assignee, demanding, for example, that any potential merger partner have assets at least equal to yours. Yet in a merger you may not be in control. Similarly, your landlord may require that any subsidiary to whom you assign your lease have assets as solid as yours. But subsidiaries are seldom as well endowed as their parent companies. A clause like this seriously hampers your business flexibility, especially if your landlord requires you to remain primarily liable even after you assign the lease, and gives the landlord little more protection.
Make sure you can assign to any subsidiary or affiliate as long as you own at least 33-1/3%; you’re safest to negotiate a deal with no capitalization restrictions on companies with which you may merge. If you think you may be acquired, preserve your flexibility by retaining the right to assign the lease to any acquiring organization that meets certain capitalization requirements, for example, that it have a net worth at least equal to yours at the date of acquisition.
