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Release of Original Tenant upon Assignment

Release of Original Tenant upon Assignment

Most commercial leases that landlords use as a standard form lease contain a provision restricting assignment of the lease by the tenant.  The provision states that the tenant cannot assign its interest in the lease without the consent of the landlord, which consent may be withheld in landlord’s “reasonable discretion” or “sole discretion.”

This initial language is fine for the landlord, but the assignment provision often is altered during lease negotiations.  Tenants want special carve-outs that permit assignments to parents, affiliates, subsidiaries or franchisees, or to a company resulting from a merger or acquisition of corporate assets.  If the landlord is going to permit such carve-outs, it must remember to insert a companion provision that states the original tenant remains primarily liable for the performance of all obligations of the tenant under the lease.  Otherwise, the original tenant is released upon assignment.  For example, if a major international restaurant chain (e.g., McDonalds, Burger King, Subway, etc.) assigns the lease to an independent franchisee, the use of the premises and business operations remain the same; however, if the tenant defaults, the landlord has lost the deep pockets and can collect from the franchisee only.

Following is a sample clause that keeps the original tenant on the hook for the tenant’s obligations under the lease:

Landlord’s consent to an assignment or sublease shall not relieve Tenant from liability under this Lease unless expressly agreed to by Landlord.

Prior to using any language or concepts from this blog entry, consult with an attorney.

Ryan Rosensteel is a real estate and construction attorney licensed in Arizona.  You can contact him at ryan.rosensteel@azbar.org.

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