Franchisee Real Estate Lease: ASSIGNMENT

An assignment in a commercial lease is the transfer of a tenant's entire interest in a lease to a new party, the assignee.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The complexity of the lease agreement for the commercial real estate that is used in the franchise operation can very easily equal, or even surpass, that of the franchise disclosure document and the franchise agreement, such that retaining the legal services of an experienced lawyer to decipher, explain and negotiate the commercial lease agreement and its schedules. And for over 25 years, we have been working with business owners, including franchisees, to understand and deal with commercial lease agreements that have been presented by landlords and are foundational to their business operations. To gain the most from our legal analysis and advice as to the commercial leasing arrangement, a franchisee would be well served to understand some of the most significant commercial leasing terminology, which we have undertaken to provide you with in-depth analysis.

An assignment in a commercial lease is the transfer of a tenant's entire interest in a lease to a new party, the assignee. The assignee takes over all the original tenant's (the assignor's) rights and obligations under the lease for the remainder of the term.

Key Aspects of an Assignment Clause

Commercial leases almost always contain an assignment clause that dictates the rules for this transfer. Landlords typically want to control who occupies their property, so these clauses are crucial for them.

• Landlord's Consent: Most leases require the tenant to obtain the landlord's written consent before assigning the lease. The clause will often state that consent will not be "unreasonably withheld." This is a key phrase because it prevents the landlord from arbitrarily rejecting a potential assignee.

• Reasonableness of Withholding Consent: A landlord's refusal to consent is generally considered "reasonable" if it is based on:

  • The assignee's financial strength is weaker than the original tenant's.

  • The assignee's proposed use of the premises violates a use clause or would create excessive wear and tear.

  • The assignee's business would compete with other tenants who have exclusive use clauses.

  • The assignee has a poor business reputation.

• Original Tenant's Liability: A critical point for both parties is that an assignment does not automatically release the original tenant from liability. In most cases, the original tenant remains secondarily liable for all obligations under the lease, including rent payments, if the assignee defaults. This is often referred to as privity of contract. The landlord can sue the assignee first, but if the assignee fails to pay, the landlord can then sue the original tenant.

• Recapture and Termination Rights: Some assignment clauses give the landlord the right to "recapture" the space rather than consent to the assignment. If a tenant requests to assign the lease, the landlord can instead choose to terminate the lease and take the space back to find a new tenant themselves, often at a higher market rate. This is particularly common in favorable markets.

• Profits from Assignment: Some leases contain a provision that requires the original tenant to share with the landlord any profit made from the assignment. This profit is the difference between the new, higher rent the assignee agrees to pay and the rent the original tenant was paying.

Naturally, how the concept operates in the specific context of the particular lease agreement requires experienced legal analysis, such that you make the most out of your understanding of the commercial lease agreement for your franchise. For such legal analysis and advice for your franchise and its commercial leasing arrangements, we welcome you to contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com to schedule a confidential consultation.

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Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.