Prohibitions on the Assignability of Leases—More Substance Than Form
From the tenant's perspective, flexibility in assignment can be essential for business growth or restructuring, while landlords typically seek to maintain oversight, continue to have financial assurances, and protect the integrity of the lease.
September 23, 2024 at 11:40 AM
6 minute read
Real EstateIn commercial real estate transactions, lease assignment provisions play a critical role in balancing the rights of landlords, tenants and potential assignees. Lease assignability clauses, which determine how and under what circumstances a tenant may transfer their leasehold interest to another party, are often heavily negotiated due to their potential impact on the property's control, value and long-term stability. From the tenant's perspective, flexibility in assignment can be essential for business growth or restructuring, while landlords typically seek to maintain oversight, continue to have financial assurances, and protect the integrity of the lease.
In the absence of any language prohibiting or otherwise limiting a tenant's ability to transfer the tenant's right in the leasehold estate, there is a presumption that a tenant should have free assignability (i.e., alienability) of the lease, based on the fundamental bundle-of-sticks theory of real property law. If the tenant is not otherwise prohibited from doing something within a lease, the general presumption is that the tenant can do that thing! For example, a straightforward provision that absolutely prohibits a tenant from assigning its interest in a lease does precisely nothing to prohibit the same tenant from subletting the entire space to a third-party subtenant.
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