A situation came across our desk this week and we thought we’d work it into a piece about circumventing assignment and subletting restrictions. As we started to scribble some notes, we were forced to rethink some of the whys and wherefores of these restrictions in the first place. And, that’s the plan today, leaving “circumvention” for later, probably next week.
As has been said here and elsewhere, a lease is a conveyance, more particularly of a “non-freehold” estate in land. It has a limited duration and isn’t really an ownership interest. What is does do is give the tenant “exclusive possession” of the land. And, by “exclusive,” it means that even the landlord does not have any right to possess or use the land (or premises).
To Ruminations, this means that when a landlord says: “I don’t want you making money from my property, after all it is mine, not yours,” its tenant should respond,” I’m not interested in making any money from your property, only from my exclusive possession of the premises.” After all, the landlord has absolutely no right to put anyone else into the premises during the lease term and the landlord doesn’t lose anything it hadn’t already lost once it agreed that its tenant had a five, ten or whatever year lease.
“OK,” you say, “but it isn’t just that the premises are going to be occupied anyway, it’s that I picked ‘you’ to be my tenant.” That might be true in a small number of special cases, but in our experience that’s just not the case. In many, many cases, the landlord is thrilled that anyone who could pay the rent is interested in the space. It usually doesn’t matter whether it is Sally or Janet or Gaeta or Yosef. For small spaces, the tenant’s bank account rarely seems to matter. And, as readers will see below, financial tests for assignees or subtenants shouldn’t even matter.
What we are saying is that once a landlord has given possession of the premises to a tenant who has obligated itself to pay rent and maintain those premises until a given date, the landlord gets the benefit of its bargain no matter who is in the space. Of course, there are going to be rules of behavior for that occupant, but they aren’t dependant on the “face” of the tenant. The original tenant remains obligated to pay the rent and remains obligated to see that the rest of the occupant’s lease obligations are met. In fact, when a tenant assigns its lease or sublets its premises, even more people are obligated to stand behind and abide by the lease’s requirements. That should be good for a landlord – an unbargained-for advantage. Yet, landlords think they can restrict their tenant’s ability to pay the rent (by barring or interferring with their tenant’s getting sublease revenue or with finding someone else to take over primary payment liability) and still insist that the tenant remain obligated to pay.
When a landlord leases space, it rolls the dice as to whether its tenant will be able to pay the rent. Landlords make their guess based on the prospective tenant’s financial and operational ability and once a lease is signed, it’s just like bowling. After the ball leaves your hand, there is nothing you (think, landlord) can do to change the ball’s direction (think, enhance the tenant’s financial worthiness). You (the landlord) made your choice and the tenant is going to hit a lot of pins or go into the gutter, so to speak. A landlord can pick a 250 bowler who stays in that range or falls off a cliff. You can pick Circuit City or Apple (today’s darling). More often, however, if the space is “sucking wind” many (most?) landlords will grab anyone short of someone on the wrong side of life support.
What does this all mean? Here’s what Ruminations is thinking. Tenants have committed to paying rent for the premises no matter whether they need the space any longer or not. You can call it “exclusive possession,” but what it really means is that a tenant has exclusive control over the premises during the lease term. It never seems to matter if the tenant runs its business “hands on” by showing up every day or hires people to do that work. Why should it matter if the tenant “hires” a whole company to operate a business within its premises? No landlord asks its tenant: “How do you pay the people who run your business?” Why should a landlord tell someone who has committed to pay rent for ten years that it, the tenant, can’t let someone else run the business within the premises? That “someone else” could be an employee or an assignee or a subtenant.
Now, we know this is getting some readers a little hot under the collar. Some will say, “But, I made my deal with ‘you.’ I expected to see ‘you’ in the premises.” No, they didn’t; in almost all cases, they only really expected “you” to pay the rent. And, in the case of a sublease, that very same “you” will continue to pay the rent. In the case of assignment, that very same “you” is in the role of a guarantor of the rent. In fact, the landlord is never worse off when it comes to financial security; it can only be better off following an assignment or even a subletting. In the case of an assignment, even if the assignee’s net worth is only a dollar, the landlord now has one dollar more of net worth behind the rent than it had immediately before the assignment. In the case of a subletting, its tenant now has its own net worth PLUS the ability to go after its subtenant’s net worth.
None of this is to say that a landlord doesn’t have a legitimate right as to things like tenant mix or to insist that a lease include provisions setting behavior rules for whoever might be in the premises, such as hours of operation or tenant parking. But, we don’t think that the name over the door matters all that much (and rarely ever in other than retail projects) and certainly don’t think that the “face” of the actual occupant matters at all. That’s not to say that a familiar trade name might not be important, but there is an irony there as well. The better known the trade name or “flag,” the less likely it is that the lease will have many transfer restrictions. Often, the best a landlord can do with a strong bargaining power tenant is to restrict “free transferability” to regional or national tenants. That means that the most onerous assignment and subletting restrictions are found in leases with tenants the initial identity of whom mattered the least when the lease was signed.
Today’s blog posting is intentionally open ended, with no attempt to answer every objection that could be raised. That’s because we’d like to open a dialog, not about how thing are being done, but about the logic behind what we all put in our leases. Help us with this project by posting your comments just under the title to this posting. You can click on “Leave a Comment” or on “Comments,” whichever you see.