As a retail shopping center landlord, your lease agreement is your BIBLE!
It sums up all the important details governing your tenant – from commencement and termination dates to rental and CAM rates to annual rate increases to exclusives and restrictions and much, much more.
But over the term of a lease, which can span anywhere from a year to a decade or more, the agreement often changes to accommodate shifting circumstances.
One of the most common lease modifications that occur during the initial term of a retail lease agreement?
A Lease Assignment
What is a Lease Assignment?
Let’s say your tenant wants to give up their space before the initial term of their lease expires. To do so without defaulting their lease, the tenant “assigns” or transfers their leasehold to another party. Which is known as a “Lease Assignment.”
Why Would a Tenant Assign Their Lease to Another Party?
There are a number of reasons why a tenant might choose to assign their lease… Perhaps your tenant is struggling and wants to sell their business and move on. Maybe they want to sell their business to pursue another opportunity. Or possibly another operator wants to take over your tenant’s business and makes your tenant an offer they can’t refuse.
How Does a Lease Assignment Work?
When a lease is assigned to a new tenant, that tenant assumes all obligations and responsibilities, financial and otherwise, defined in the “assigning” tenant’s lease agreement. In addition, the new tenant will deal directly with you. And once the leasehold is assigned, the original tenant has no further obligation to you.
Does A Tenant Need Landlord Approval to Execute A Lease Assignment?
A tenant absolutely needs your approval to assign their leasehold to a new tenant. You are, after all, taking on a brand-new tenant. And you have every right to vet that tenant.
The vetting process for a lease assignment is basically the same as qualifying a new tenant. The replacement tenant must submit a lease application, consent to a credit check, provide financial documentation, including confirmation of assets and tax returns, and verify their business track record.
Can a Landlord Refuse a Lease Assignment?
Technically, you’re free to refuse a lease assignment. Ultimately, it’s your property, and you have the final say. But it should be noted that it’s illegal in California for a landlord to “unreasonably” deny a lease assignment request.
Of course, there’s some debate about what constitutes “unreasonable.” But California courts have consistently held that a landlord must present a logically valid reason for denying a lease assignment if their denial is challenged in court.
Can Conditions Governing a Lease Assignment Be Negotiated With the Original Lease?
When negotiating a lease, you can outline specific terms under which a replacement tenant would qualify for a lease assignment. It’s perfectly “reasonable” to insist that the new tenant demonstrate financial stability, a sound business track-record, and strong character.
This why most pre-formatted lease agreements, such as AIR Forms – the industry standard in commercial retail shopping center lease agreements – include boilerplate language addressing lease assignments.
Can You Collect a Fee for Processing a Lease Assignment Request?
Processing a lease assignment application is basically the same as processing a new lease application. If a broker or property manager processes the lease assignment application, they will likely charge you a fee. And even if you process the application yourself, you’re spending valuable time to do so.
As such, you have the right to ask for compensation in exchange for processing lease assignment, which is commonly known as an “assignment fee.” This fee can be collected when the replacement tenant submits their application.
The fee is non-reimbursable, regardless of whether the lease assignment is approved. Additionally, the fee may be paid by either the assigning tenant or the replacement tenant.
Need Assistance Negotiating A Lease Agreement For Your Retail Shopping Center?
Negotiating and drafting leases is a big part of the retail leasing services CBM provides to retail landlords.
Our leasing agents will deftly guide you through the negotiating process, securing favorable terms on your behalf. And draft lease agreements that ensure your maximum profit, while carefully safeguarding your interests.
For more details on how CBM can help your cause, visit our leasing services page: cbm1.com/leasingservices