Dec 9, 2011 Article #80 Author: Joe Sandbank, Esq.
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
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Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry. Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer. Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world. There he participated in more than $11.5 billion of merger and acquisition transactions. He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University. Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions.