Lease Assignment Provisions—Why They Matter

When a tenant assigns its rights and interest under a lease to a successor tenant, the enforceability of the assignment and its legal consequences are usually addressed and governed by language in the assignor-tenant’s lease or a lease assignment document. The landlord’s attorney usually will provide carefully-crafted language sufficient to resolve almost every issue related to assignment that could arise. Even so, it is helpful to understand the law behind assignment provisions and to be aware of the most common legal issues landlords sometimes face despite those protective provisions.

The law of most states does not distinguish between usufruct leases, which confer mere use rights (usually shorter term leases) from estate-for years leases, which grant an interest in land (e.g., a 99-year ground lease). Georgia law, however, distinguishes between these two types of leases. The assignment of a Georgia usufruct lease, but not an estate-for-years lease, releases the assignor-tenant from liability to pay rent owed by the defaulting assignee-tenant unless the landlord expressly reserves the right to proceed against the assignor-tenant. By contrast, unless assignment language provides otherwise, a tenant who assigns its estate-for-years lease remains fully liable with the assignee-tenant for rent that accrues for the balance of the lease term.

Since an estate-for-years tenant has an interest in land, that tenant may freely assign its lease without the landlord’s consent or permission absent surrender of that right in the lease. The rights and interest of the tenant under the estate-for-years lease “run with the land,” which means that those rights are tied to the property and not to the owner. Whenever an assignment occurs, those rights transfer from the first tenant to the second (though, as noted above, the original tenant usually remains fully liable for future rent). The tenant holding only a usufruct interest (use right) under its lease has no such right of assignment absent language in its lease or an assignment document expressly allowing assignments. Almost always, the landlord who gives the usufruct tenant an assignment right reserves the landlord’s right to give its consent to any proposed assignment of a usufruct lease. An estate-for-years lease is less likely to include a provision allowing the landlord to reject a proposed assignment.

Legal issues may arise because a tenant simply ignores (or cleverly avoids) the assignment language. Occasionally, a tenant holding only a use right under its lease will transfer possession of its leased premises to a successor tenant without seeking permission of the landlord required under the assignment provision in the lease. An unauthorized assignment may also occur where the tenant changes the legal entity under which it operates its business in the leased premises, which can take place through merger or stock transfer. In such a case, a vigilant landlord would then have the unilateral right to elect to treat its assignor-tenant’s unauthorized assignee-tenant as the landlord’s tenant under the lease for the full term, thus giving rise to a new landlord-tenant relationship. If the landlord exercises this right of election, the original tenant’s obligations under the usufruct lease will be extinguished unless the lease expressly maintains those obligations. Alternatively, the landlord may expel the assignee as an unlawful intruder, in which case the original tenant remains fully obligated under the lease for the balance of its term.

Especially where a landlord receives rent from its tenant through a drop-box or electronic funds transfer (EFT), a tenant seeking to escape a burdensome lease might shift the rent payment obligation to an unapproved successor tenant about which the landlord may be unaware. If the landlord accepts rent from someone other than the original tenant under the usufruct lease over a period of time, the landlord may be deemed as a matter of law to have waived its right to object to and expel the unauthorized replacement tenant. For this reason, it is advisable for a landlord to cease acceptance of rent through EFT or drop-box delivery and insist upon verifiable means of payment where a tenant is struggling and proposes a lease assignment.

To address unintended consequences that force an unwanted assignment upon a landlord, the assignment language should perhaps include language that prohibits assignments by operation of law associated with a merger or certain other types of business transactions. A transfer of control within a corporation or other business entity through altered equity interests might effectively constitute an assignment from the viewpoint of the landlord, so the language must address that issue as well. To encourage a tenant to seek consent, it may be wise for a landlord to agree that its consent will not be unreasonably withheld. Since courts generally disfavor restrictions on alienation of leases, a provision that gives the landlord the absolute right to withhold consent to an assignment may be subject to attack in court in the future. While assignment provisions in leases and assignment documents cannot necessarily and completely eliminate all risks associated with unanticipated changes in the lease assignment law and wily efforts of tenants to advance their interests through unauthorized lease assignments, a landlord can minimize the risk through carefully worded assignment provisions and a proper level of understanding of the legal issues usually associated with unauthorized assignments.

Related Industries