“Assignment” in the context of a lease means changing the “tenant” entity. Typical examples of when you would want to assign a lease include:
• when you want to share your clinic with another or others, as when you share your practice with an associate;
• when you want to pass your lease from one tenant to another, as when you assign the lease from yourself to a professional corporation, or when you assign the lease as part of the sale of your practice when you transition;
• when you want to change share position in the tenant company, as when you sell part of your practice to a family member or a partner;
• when you want to use the practice or part of it as collateral for financing, as when you refinance or when the buyer of your practice needs to finance the purchase.
Because it’s likely that every lease will be assigned in one form or another over the life span of the tenancy, understanding and administering your assignment provision is critical. In a real sense, the assignment provision in your lease controls the value of your practice. Failing to follow the assignment process set out in the lease has very serious consequences, which may include lease termination.
From the landlord’s point of view, the landlord originally leased the premises to a certain entity which it investigated and confirmed to be credit worthy and viable in a long-term sense. The landlord does not want the original tenant entity to change without its consent because the landlord wants to retain or improve on the strength of the tenant. The landlord also recognizes a leverage position to make some money on the way through an assignment. If you have a conditional offer to sell your practice and the only issue preventing you from closing the sale is the landlord’s consent to assignment, you, not the landlord, have a problem. The landlord will ask you to make it worth his/her while to agree to assignment.
From the tenant’s point of view, ultimately, the tenant would want to be able to assign the lease without the landlord’s consent. Further, often assignment is an opportunity to renegotiate certain elements of the tenancy such as adding options to renew or release the assigning tenant.
Understanding the two points of view, and the implications of the assignment mechanism in the lease enables the tenant to manage his/her position. Study and understand your lease to determine what constitutes “assignment”, whether the landlord’s consent is required in each form of assignment, what the process involves to request assignment, what the landlord’s options concerning assignment are, what you as the assigning entity and what the assuming entity want out of the process, and what the timeline is for the anticipated assignment process.
Typically, the process to assign a lease involves requesting the landlord’s consent to assignment, paying the landlord’s fee, providing the landlord with required documentation to confirm that the assignment is to a valid and solid tenant, review and revision of the assignment agreement, and negotiation of “gottchas” such as:
• the assigning tenant is not released on assignment, which essentially means the landlord now has two entities “on the hook”;
• changing lease terms and conditions at the time of assignment such as increasing rent, removing options to renew or exclusivity, or introducing a demolition clause, each of which may frustrate a proposed sale;
• terminating the lease instead of agreeing to assignment which does end a proposed sale;
• taking all sale proceeds from the practice sale on assignment, which will end a proposed purchase and sale.
STRATEGIES TO MANAGE THE ASSIGNMENT PROVISION
1. You need to understand your lease, especially your assignment provision in the context of what you expect to do over the time both you and your successor own the practice. If you wait until you have a conditional offer to purchase to review and administer your lease assignment clause, you have given your landlord a leverage position you may deeply regret.
2. When you understand what the clause says, and what the practical implications are, you need to negotiate the terms and conditions of your assignment clause. This negotiation is far more effective at the original offer to lease or lease negotiation phase. A distant second choice negotiation time is at lease term renewal. It is very difficult to re-negotiate the assignment provision at other times, but not impossible.
Our best advice is to have your lease properly negotiated at the offer to lease or original lease negotiation time. If you are an existing tenant, you need to have your lease reviewed to understand your assignment provision and plan a strategy to correct deficiencies at any opportunity.