For new and emerging businesses, and even established retailers that are in an aggressive expansion mode, the attraction of a great location can create pressure to accept unfavorable lease provisions that can interfere with a potential sale of the tenant’s business in the future.

An assignment and sublease provision is one such clause.

For many business owners the idea of selling their business may seem unimaginable or so remote that it does not warrant consideration in the context of negotiating a new lease. However, a company’s leased premises can be one of its most important assets. In our experience representing sellers of retail chains, the importance of a well-crafted assignment clause that contemplates the eventual sale of a tenant’s business cannot be over-stated. A one-sided lease which, for example, makes all transfers (including the sale of substantially all of a tenant’s assets) subject to landlord’s consent in its sole discretion or imposes rent increases or automatic termination rights in the event that tenant proposes an assignment, has the potential to scare away prospective buyers because of the undue delay and potential cost that will inevitably occur in seeking to obtain the landlord’s consent to a proposed assignment.

Although landlords will often insist upon an outright prohibition against assignment, there are industry standard compromises that can be reached to protect the landlord with respect to credit-worthiness, tenant mix, and operating experience (among other considerations) while also providing the tenant with an orderly exit strategy in the event of a sale of its business. In most cases, failure to spend time and resources up front to negotiate a more favorable assignment and sublease clause will cost the tenant substantially more time and money in the end if it desires to sell its business and assign its lease.

This article will address two typical provisions (based upon language commonly used in leases) that are often overlooked in the rush to secure a new location but can be very problematic for a tenant that wishes to sell its business and assign its existing leases in the future.

Two Problematic Provisions

 1. “Excess Consideration”

“In the event of any permitted assignment, Tenant shall pay over to Landlord any rent or other consideration received by Tenant in connection with such permitted assignment in excess of the annual fixed rent paid by Tenant for the Premises”

The intent of this “excess consideration” clause, from a landlord’s perspective, is to ensure that a tenant whose base rental obligations are below market does not assign the lease for a “profit” or sublease its space at a higher rate and thereby transform the leased premises into a profit center for the tenant. Although this may seem reasonable in concept, the devil is in the details. The problem with the language quoted above is that it is over-broad. The purchase price for the sale of a business as a going concern may take into account the value of existing leases as well as the tenant’s other tangible and intangible assets. An aggressive landlord could take the position, based upon the above language, that it is entitled to the entire purchase price being paid for the tenant’s business enterprise. While this is clearly not the intent of the language, it can be used by a landlord to gain leverage over a tenant and a proposed assignee to block an assignment or require amendments to the lease that are favorable to the landlord.

In its initial lease negotiations, a tenant should try to delete any excess consideration clause from the lease. If that is not possible, then the provision needs to be carefully crafted to exclude lump sum payments made in consideration for the sale of a tenant’s business, with the possible exception of a payment made by the assignee due to below market rent and provided such payment is expressly identified as such in the asset purchase agreement. The provision should otherwise be limited to a situation where the tenant subleases the leased premises and the actual rent payable by the sublessee to the tenant exceeds the rent received by landlord under the lease.

2. “Termination Right”

“If Tenant desires to assign this Lease or to sublet all or a portion of the Premises, Tenant shall deliver to Landlord a summary of the proposed terms of such sublease or assignment . . . [and] Landlord shall have the right to terminate this Lease.”

This provision allows the landlord to terminate the tenant’s lease based upon the tenant’s mere request for an assignment. The rationale for such a provision might be that the landlord contracted with a particular tenant for specific reasons and has no obligation to consider alternative tenants. It also allows the landlord to analyze the proposed assignee and, if the rental rate under the current lease is below market, enter into a new lease with the proposed assignee at market rent. Nevertheless, this is a fairly draconian provision and a tenant should seek to have it deleted. At the very least, the lease should allow the tenant the opportunity to rescind its request to assign and nullify the landlord’s termination of the lease.

The foregoing are just two components of assignment and sublease provisions that a tenant may be tempted to overlook in an effort to secure a great location, but that can adversely affect a company’s ability to sell its stock or assets in the future. A better approach is to anticipate the possibility that a sale may be a great option down the road and negotiate up front for commercially reasonable terms that will allow the tenant to assign its lease to a reputable and credit-worthy assignee in connection with the sale of its business.