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LEASE ASSIGNMENTS - WHAT EXACTLY DOES THIS MEAN?

The purchase of a business almost always involves the buyer either obtaining a new lease or obtaining an assignment of the seller’s rights to the existing lease.  The “assignment” of a lease occurs when the existing tenant, the “assignor,” transfers (assigns) his rights and obligations under the lease to a new tenant, the “assignee.”

In some cases, a seller may be able to assign his rights in a lease to a buyer without the landlord’s involvement.  For instance, in California, a lease that is silent with respect to the issue of assignability is freely assignable by the tenant.  Also, in rare cases, the lease itself may state that it is freely assignable.

More commonly, however, a lease contains language indicating that the lease may be assigned only with the landlord’s written consent.  This restriction on assignability often raises questions regarding the landlord’s ability to withhold such consent.  In some jurisdictions, a landlord may withhold consent for any or no reason.  In other jurisdictions, however, there are limitations on the landlord’s ability to withhold consent. 

A lease may contain express standards or conditions for the landlord to follow in granting or withholding consent to an assignment, or it may indicate that the landlord may not unreasonably withhold consent.  In California, if the lease does not set forth specific standards for granting or withholding consent, the restriction on assignment is interpreted such that the landlord may not unreasonably withhold his consent to assignment.  If the landlord rejects a proposed assignment, the tenant may request a statement of the reason why consent was withheld, and these reasons then become the basis by which a court can judge whether or not the consent was withheld reasonably.

California courts have held that it is reasonable for a landlord to withhold consent if, in good faith, the landlord determines that the proposed tenant does not have the ability to fulfill the terms of the lease, is financially irresponsible or unstable, or if the premises are not suitable for the intended use.  On the other hand, a desire to raise the rent to current market rates is generally not considered a reasonable reason to withhold consent.  Although the rule may differ from jurisdiction to jurisdiction, reasonableness is otherwise determined on a case by case basis based on the specific circumstances at hand.

Buyers and sellers must understand, however, that even if assignment of the lease is permitted, unless the landlord expressly releases the seller from its obligations under the lease (such a release is called a “novation”), the seller will remain obligated to the landlord under the terms of lease.  In other words, if the buyer defaults on the lease, the landlord may take legal action against the seller to recover unpaid rent and other payments due under the lease. 

Early recognition of the legal issues involved in a lease assignment will help you avoid surprises and greatly increase the likelihood of a successful acquisition or sale.

Law Office of Joe Sandbank
915 Highland Pointe Dr, Ste 250
Roseville, CA 95678
(916) 724-5337
Toll Free (800) 875-1480

SellingRestaurants is a professional restaurant brokerage firm specializing in the sale and leasing of restaurant businesses for sale. We are the premier restaurant for sale company with locations in California, Arizona, Washington, Georgia.  Contact me at 480.274.7000