Month: July 2022

A reader recently asked me to write an article on what would be deemed a constructive eviction and what would a tenant’s chance be of getting out of a lease based on such a defense when the landlord does not maintain the property as it should. Unfortunately, the rule for determining what constitutes a constructive eviction does not assist much in determining whether a constructive eviction has occurred. A tenant, however, is not without options.

When Does a Constructive Eviction Occur?

A tenant will be deemed to have been constructively evicted from its premises if the landlord fails to provide a service that it is legally obligated to provide, or the landlord or a third party engages in an activity that the landlord has a duty to prevent, and such act or omission renders the tenant’s premises uninhabitable or the use and enjoyment of the tenant’s premises is so interfered with so as to justify an abandonment. In other words, it depends. It depends on whether the landlord has failed to undertake its express or implied duties under the lease. It depends on whether the landlord’s behavior has so interfered with the tenant’s enjoyment of its premises that the tenant is justified in abandoning its premises. It depends on whether the tenant can interpret an ambiguous and convoluted rule that only a few lawyers and judges can understand. Unfortunately, there is no black and white guidance for determining a constructive eviction situation as it depends on the facts of each case.

Regardless, a tenant cannot make the claim that it was constructively evicted unless it actually abandons its premises and unless it does so within a reasonable amount of after the occurrence of the act or omission that gave rise to the constructive eviction. A court will have a difficult time finding that the conditions in the tenant’s premises are so intolerable so as to justify a constructive eviction defense if the tenant continues to occupy its premises for an extended period of time after the alleged constructive eviction occurs, and the tenant will be precluded from raising such a defense if it never abandons its premises.

What is a Tenant to Do?

Unfortunately for tenants, a constructive eviction defense is a gamble. If a tenant is successful, the tenant will not be liable for any rent that is due under the lease after the occurrence of the eviction. If the tenant is unsuccessful, however, the tenant will either be paying on two leases as the tenant will be obligated to find a replacement premises once it abandons the existing premises, or the tenant will be required to pay its first landlord substantial damages for defaulting on its lease covenants. A tenant must ask itself if the conditions at its current premises are so unbearable that it is willing to take the landlord to court to get out of its lease.

A tenant does have other options. First and foremost, a tenant should communicate its issues with the landlord and it should do so in writing. The tenant should give the landlord a timeframe for when the issues need to be resolved, and should notify the landlord that the tenant views the landlord’s behavior as a default under the lease. The tenant should also review the lease terms to determine if the tenant can cure the default and offset any costs that it incurs against future rent payments. Finally, a tenant can bring the landlord to court without having to abandon its premises and can either seek damages from the landlord or seek an injunction prohibiting the landlord from undertaking any such activity in the future.

Success Stories

In making its decision as to whether a tenant should bring a constructive eviction defense, it should consider the types of circumstances where courts have found that a constructive eviction has occurred. The following are some examples of tenants who were successful in raising a constructive eviction defense:

• A tenant was deemed constructively evicted when a landlord failed to fix a leaky roof and defective plumbing, both of which the landlord was obligated to maintain under the lease terms.
• A tenant was constructively evicted when a landlord failed to provide sufficient heating during the winter months.
• A tenant that operated a bakery was constructively evicted due to rats being “abundantly and persistently present” in its premises. The rats had repeatedly eaten the tenant’s baking supplies.
• A tenant was constructively evicted when the landlord failed to provide sufficient heat or adequate elevator services to an eighth floor apartment.
• Two tenants were constructively evicted from their residential apartment due to an infestation of bedbugs coming from other apartments in their building.

The courts created a constructive eviction defense to help tenants escape intolerable lease conditions and not to remedy minor violations of the lease covenants. If such conditions exist for a tenant, this defense provides a great tool for tenants who no longer want to tolerate such conditions. The defense, however, should only be used in limited circumstances as the consequences of a failed defense can be disastrous.

DISCLAIMER: This article is to be used for general information purposes only, not as a substitute for in-person evaluations. The information contained herein is not legal advice and no attorney-client relationship is formed through this article.

Subordination, Non-Disturbance and Attornment Agreements (“SNDA”s) have become increasingly popular and are now prerequisites to most lending transactions. We have all seen them, requested them, and negotiated lease provisions obligating the tenant to provide one when requested by the landlord’s lender. Many of my clients, however, do not know what their function is or why they are significant.

What Is a SNDA and Why Do Lenders Care?

The basic function of the SNDA is to set forth the rights of the lender under its mortgage vis-à-vis the tenants occupying space at the property mortgaged. The basic SNDA accomplishes three goals: (1) it subordinates the rights of the tenant under its leasehold interest to the lien of the mortgage, (2) it obligates the lender to agree to not disturb the rights of the tenant if the lender forecloses on its lien, and (3) It obligates the tenant to attorn to the purchaser at a foreclosure sale (in other words, the tenant will recognize the purchaser at the foreclosure sale as the landlord under its lease).

A lender’s biggest concern with leasehold interests and its mortgage is priority. In most cases a lender wants to guarantee that its lien is superior to all leasehold interests so that the rights of the tenants do not hinder the lender’s ability to exercise its rights under the mortgage (e.g. the ability of a lender to apply the insurance proceeds received after a casualty to reduce the principal balance of the loan, or the ability of the lender to eliminate any tenant claim that it has an ownership interest in the property that is not subject to the lien of the mortgage). The SNDA guarantees that the lender’s lien will have priority, that the lender will be able to foreclose against the entire property, and that it will be able to exercise all of its rights.

A SNDA also guarantees that the landlord will be able to preserve the leases at the property (in most cases). A fully leased property is worth far more than an empty building and many anchor tenants are essential to the value of the property. In certain circumstances a tenant can walk away from its lease once the lender foreclosures on its lien if the leasehold interest has been subordinated. The landlord wants to avoid this and therefore needs an agreement from all tenants that they will recognize future owners of the property as the landlord under the tenants’ leases.

Why Tenants Should Care About SNDAs

Foreclosures create drastic changes in properties. The tenant may or may not have priority over the landlord’s mortgage and a foreclosure sale may terminate the tenant’s leasehold interest against the tenant’s wishes causing the tenant to lose not only its leasehold interest but also the tenant improvements that it installed at the property. The purchaser at the foreclosure may have no obligation to undertake the landlord’s obligations under the lease and a tenant will be obligated to continue to pay rent regardless of the landlord’s performance. The tenant’s security deposit may have been whipped out when the landlord’s financial condition deteriorated. These are all problems facing a tenant when the landlord’s lender forecloses. A well drafted SNDA will reduce the risk facing a tenant in a foreclosure setting, will help the tenant to preserve its leasehold interest, and will help the tenant to avoid thousands of dollars in legal fees and costs when the leasing relationship sours.

Issues for Landlords to Consider When Drafting a Lease

Most leases obligate the tenant to execute a SNDA when requested by the landlord’s lender. Most of these provisions, however, fall short of what is required to adequately protect a landlord. Unless the lease sets forth the specific obligations of the tenant with regard to a SNDA, or attaches a form of a SNDA, a provision in the lease that obligates the tenant to execute a SNDA will only obligate the tenant to execute a form that subordinates the leasehold interest to the lien of the mortgage and nothing further. In fact, the tenant will have no obligation to execute any SNDA that alters the lease terms in any way, which is what most SNDAs do. Although a subordination of the leasehold interest is essential, most lenders want the nuts and bolts that go along with standard SNDA forms. Prudent lenders should therefore consider attaching an industry standard form of SNDA or set forth a list of specific items that the tenant must agree to in a form of SNDA. The problem for landlords is always anticipating what their future lender will request. A landlord will never be able anticipate all requirements of its lenders, but by attaching a form of SNDA that has the standard language requested by most lenders the landlord can avoid many future tenant disputes.

An additional issue for landlords requesting an SNDA is timing. SNDAs are usually requested a couple of weeks before a closing of a loan or a sale of a property. By the time that the tenant receives the SNDA, reviews it with its attorney, provides comments to the landlord’s attorney, and the two sides negotiate revised provisions, several weeks have usually passed and the closing could be delayed or even abandoned due to the landlord’s failure to obtain a SNDA acceptable to the landlord’s lender. It is therefore essential that landlords include specific deadlines in their leases. A tenant should be required to return a signed SNDA or any comments within five business days, and the tenant should be obligated to provide alternate language when objecting to a term in the SNDA. Additionally, there should be a general obligation that the tenant acts in a timely manner. Any violation of these requirements should be a default under the lease.

An additional provision that landlord’s should add to the lease is language that the lease is automatically subordinate to the lien of any mortgage executed by the landlord regardless if the tenant executes a SNDA. Most lenders will likely not be satisfied with general subordination language in a lease, especially for anchor tenants’ leases, but some lenders may be willing to accept such language in lieu of a SNDA for some of the smaller tenants. A landlord may also consider drafting the subordination language so that the subordination of the lease is not automatic and is at the option of the lender. There are certain circumstances where the lender may wish to keep the lien of the mortgage subordinate to the leasehold interest (e.g. to avoid an unintentional lease termination that may occur when the lender forecloses on its lien).

Issues for Tenants to Consider When Drafting a Lease

There are generally two main issues for tenants to consider when executing SNDAs: costs and giving up rights. Every time that a tenant is obligated to sign a SNDA, it will likely have its attorney review the form. This costs time and money. A tenant should therefore require that the lease obligate the landlord to reimburse the tenant for its legal fees in connection with the review and execution of each SNDA. At a minimum, a tenant should request that the landlord pay the tenant a set fee for each SNDA requested.

The second issue facing tenants is that tenants do not want to give up material rights that they have in the lease and future landlords may not be obligated to perform under the lease. To avoid this scenario a tenant should require that the lease provision that obligates it to provide a SNDA state that the tenant has no obligation to execute any SNDA that materially alters its rights under the lease. The subordination should also be subject to the lender agreeing to be bound by all of the lease terms.

Most importantly, the lease provision obligating the tenant to execute a SNDA should make any subordination by the tenant of its leasehold interest subject to the lender or any other purchaser at a foreclosure sale agreeing to recognize the tenant’s lease, to not disturb the tenant’s right to possession under the lease, and to perform all of the covenants under the lease. Unwitting tenants often execute SNDAs, or agree to lease provisions, that subordinate their leasehold interests, but which do not obligate the landlord’s lender or other future landlords to perform under the lease. Many lease provisions will also allow the landlord’s lender to whip out the leasehold interest when it forecloses. A tenant should never agree to such terms.

DISCLAIMER: This article is to be used for general information purposes only, not as a substitute for in-person evaluations. The information contained herein is not legal advice and no attorney-client relationship is formed through this article.

Your existing tenant’s lease has come to an end. You’ve lined up a new tenant, spent hours negotiating a lease, signed it up, and are ready to move forward. You only have one small problem; your existing tenant hasn’t vacated its premises yet. What can you do? A landlord’s behavior at this stage is key to how the courts will treat the existing tenant’s occupancy and therefore requires careful consideration.

How to Treat a Holdover Tenant

Under Minnesota law a landlord may either treat the holdover tenant’s occupancy as “wrongful” with no additional right of occupancy or as a tenant holding over under the terms of the existing lease. If the landlord selects the former, the landlord must follow specific rules to avoid an inadvertent extension of the lease term. First, the landlord must not dictate new lease terms for the tenant’s occupancy as such demands will be deemed to be an acquiescence to the tenant’s occupancy and therefor an extension of the lease term. Second, the landlord cannot accept rent from the tenant for the holdover period for the same reason. Third, if the tenant had any extension options and failed to comply with the applicable requirements under the lease for exercising such an option, the landlord must notify the tenant in writing prior to the expiration of the lease term that the tenant failed to comply with such terms and therefore has not exercised the option. Finally, the landlord should take concrete steps towards evicting the tenant as soon as possible including notifying the tenant immediately that the tenant no longer has the right to occupy its premises and that it must vacate, and initiating an eviction action.

If the landlord does not treat the tenant’s occupancy as wrongful, the tenant will be deemed to be occupying the premises pursuant to the terms of the existing lease. The question, however, is how long the tenant has the right to occupy its premises. If the lease is for a premises in an urban location and under a lease where the tenant pays rent on a monthly basis, the tenant will be deemed to be a month-to-month tenant unless the lease states otherwise and the landlord must give the tenant at least one month’s prior notice in order to terminate the lease term. Absent specific lease terms addressing a holdover, a tenant occupying a premises that is not located in an urban location, or not paying rent on a monthly basis, may be deemed to have extended the lease term for several months, a year, or more simply by continuing to occupy its premises after the expiration of the lease. A prudent landlord should therefore negotiate with its tenant the terms and conditions pursuant to which the tenant is occupying its premises during the holdover period.

Note also that the landlord’s decision is final and therefore the landlord should consider what the best action is for the landlord to take. The landlord cannot initially inform the tenant that it must immediately vacate its premises and subsequently attempt to charge the tenant rent, or initially demand that the tenant pay a holdover rental rate and then attempt to evict the tenant without the prior notice. A landlord must live with its decisions.

Lease Provisions Addressing a Holdover

Many leases include lease provisions that address a tenant’s holdover. Unless the lease provisions state otherwise, they will only control if the landlord does not treat the tenant’s occupancy as wrongful. The landlord reserves the right to evict the tenant at the expiration of the term regardless of the existence of holdover provisions in the lease.

Note also that if the existing lease contains unexercised options to extend the lease term, a tenant’s continued occupancy may indirectly exercise the option and extend the lease term unless the landlord states otherwise. A landlord should therefore control the situation by informing the tenant in writing that the tenant has not exercised its option.

At the end of the day the landlord’s and tenant’s behavior may be interpreted by the courts in ways that the parties did not intend. The landlord should therefore inform the tenant in writing what terms and conditions apply to the tenant’s occupancy or, if the landlord wants the tenant out, inform the tenant that it has no right to occupy its premises and will be evicted.

DISCLAIMER: This article is to be used for general information purposes only, not as a substitute for in-person evaluations. The information contained herein is not legal advice and no attorney-client relationship is formed through this article.

Often when I negotiate a lease I am surprised when a tenant or its representative skip over the condemnation provisions in the lease form as they deem these provisions as superfluous boilerplate. The prevailing view is that these provisions will never affect the tenant’s rights as the tenant does not own the fee title to the property and the chance that the property will be condemned is so remote that there is no use worrying about a condemnation during the lease term. A tenant may find that when it receives notice of a taking of its premises, it will need to find a new premises and it will not be reimbursed for its moving expenses, loss of business or, most importantly, the thousands of dollars’ worth of tenant improvements that it put into its premises possibly only a few months ago. Tenants should be aware of what they are getting into prior to agreeing to spend a substantial sum of money in tenant improvements, and they should properly structure their leases so as to preserve any rights they may have.

Generally, a tenant is not entitled to receive an award for the loss of its business, its moving expenses (but it may be entitled to relocation assistance), and the cost of removing its personal property and other removable fixtures owned by it from its premises. If the condemnation provisions in the lease are structured properly, however, a tenant will be entitled to an award for the value of the unexpired leasehold interest and the value of the use of its tenant improvements for the remainder of the lease term. A tenant should follow the following specific steps when drafting its lease so as to preserve these rights.

First, a tenant should require that it is the only party who holds a termination right upon the occurrence of a condemnation, and the termination should not be automatic or exercised by the tenant at any time. Most condemnation provisions in a lease either grant both parties with a termination right upon a “taking” of all or substantially all of the premises by a condemning authority, or automatically terminate a lease upon such a taking. Minnesota courts view both such provisions as an automatic termination of the lease entitling the tenant to neither reimbursement for its leasehold interest nor compensation for the loss of the use of the tenant improvements. As the tenant is only entitled to reimbursement for its interests as of the day of the taking, and the tenant no longer has any interest in the premises as of the day of the taking because the lease has terminated, the tenant no longer possesses a compensable interest. The only way for a tenant to preserve any rights in a condemnation award is by requiring that the lease language read that the tenant alone has the right to terminate the lease upon a taking.

Second, a tenant should not terminate the lease upon receiving notice of a taking of its premises. Once the tenant terminates the lease, the tenant extinguishes any right to receive an award for the same reasons as stated above.

Third, a tenant should pay particular attention to how tenant improvements and fixtures are treated in the lease. If a tenant has paid for the improvements, but it will not remove the improvements at the expiration of the lease, the lease should be drafted to state that the improvements remain the property of the tenant, but will become the property of the landlord at the expiration of the lease. By drafting the lease in this manner, a tenant will preserve its right to obtain an award for the value of the use of its improvements for the remainder of the term. Note that a tenant will not be entitled to an award equal to the value of the improvements themselves so the tenant will not be made whole, but by properly structuring the lease in this manner the tenant will be entitled to at least a partial reimbursement.

Fourth, a tenant should require that the condemnation provisions in the lease do not obligate the tenant to pay rent once a taking has occurred. As the tenant will not be terminating the lease, the tenant does not want to be in a position where it has to pay rent for a premises that it cannot use. Note, however, that if a taking renders a tenant’s premises untenantable, and the tenant vacates the premises, the tenant will no longer have an obligation to pay rent.

Finally, the tenant should not agree to any provision in the lease that states that the tenant waives any rights that it may have to a condemnation award. The parties are free to contract out of any rights that they may have. By agreeing to such a provision, the tenant will have waived all rights that it has to receive an award from the condemning authority.

It is true that a tenant’s premises will likely not be affected by a condemnation proceeding. However, the same could be said about the risk that your house will burn down in the next year or that you will be involved in an accident on your way home from work, yet most people find it advantageous to maintain insurance for their home and car. A tenant should devote the same amount of care when negotiating condemnation provisions in a lease.

DISCLAIMER: These articles are to be used for general information purposes only, not as a substitute for in-person evaluations. The information contained herein is not legal advice and no attorney-client relationship is formed through these articles.

An oral lease can be valid if the term is under a year. Any oral lease or sublease for a term over a year is not valid. An assignment of a lease with more than a year remaining on the term, or any oral amendment or modification of a lease with a remaining term of more than one year, is also invalid. There are also prohibitions on landlords maintaining oral leases for residential premises in buildings with twelve or more units regardless of the length of the term.

• Is a landlord liable for injuries suffered by third parties that occur in the tenant’s premises?

A landlord can be liable in certain circumstances for injuries suffered by an employee, invitee, etc. (e.g. for violations of housing codes).

• Can a landlord go after the tenant’s spouse for amounts due?

A tenant’s spouse is generally not considered a co-tenant simply by the nature of the relationship of the tenant and his or her spouse. There are limited circumstances when a landlord can go after the assets of a spouse who is not a signatory to the lease, but these circumstances are very limited.

• Can a tenant withhold its rental payment if the landlord does not undertake its obligations under the terms of the lease?

Generally, no. The tenant’s covenant to pay rent is independent of the landlord’s obligation to perform under the lease. There are, however, statutory exceptions to the general rule. For example, if the landlord violates the implied covenant of habitability in a residential lease, the tenant can withhold its rental payment.

• When does the tenant’s obligation to pay rent accrue if the lease is silent?

If there are no provisions in the lease with regard to when the tenant is obligated to pay rent, the tenant is obligated to pay rent at the end of the term of the lease. Note that most leases contain provisions stating that the tenant’s rental amount is due on a monthly basis. This provision will likely be interpreted to mean that the rent payment is due monthly.

• Does a landlord need the tenant’s consent before assigning its interest under the lease?

Generally, no unless the lease specifically requires the tenant’s consent.

• What implied covenants are contained in every lease?

The tenant has the implied duty to not commit waste (i.e. not intentionally or negligently destroy the premises), to make repairs necessary to maintain the premises (but excluding substantial repairs), and to return the premises to the condition that it existed in at the commencement of the lease term including removing any improvements that the tenant added to the premises. The landlord must comply with the implied covenant of quiet enjoyment (i.e neither the landlord nor a third party with superior rights to the landlord may interfere with the tenant’s quiet enjoyment of the premises), and the implied covenant of habitability for residential leases (i.e. all premises are habitable and the conditions in the premises are reasonably suitable for human residence). Note that the tenant’s covenants can be modified by the terms of the lease.

• Can a landlord accept rent without waiving an existing tenant default?

Generally, no. The landlord, however, must have knowledge of the default. There is also an exception if the default is of a covenant in the lease that is part of the consideration that the landlord receives for leasing the tenant’s premises (e.g. the covenant to pay real estate taxes).

• Does a landlord have a duty to mitigate damages?

Until such time as the lease is terminated, the landlord has no obligation to mitigate damages. Once the lease is terminated, however, the landlord does have such a duty.

• Can a landlord or tenant seek attorney’s fees and expenses if it successfully sues to enforce lease covenants?

Absent a specific contractual or statutory obligation (the latter of which is very rare), each party is responsible for its own legal fees. A court will also enforce a lease provision that obligates the losing party to pay the successful party’s legal fees.

DISCLAIMER: These articles are to be used for general information purposes only, not as a substitute for in-person evaluations. The information contained herein is not legal advice and no attorney-client relationship is formed through these articles.

Many tenants have been unable to survive in the current economy or have been looking for ways to reduce their overhead. To help solve their financial woes they have tried to offload that extra office space they no longer need or want. Although landlords are hesitant to release tenants from their leases outright, landlords are willing to consider subleases for a portion of a tenant’s space, or an assignment of the leasehold interest to new financially viable tenants. These arrangements, however, do not always work out for the best and many of these assignees or subtenants invariably breach the terms of their leases. Landlords need to know their rights before they consent to any sublease or assignment, and must be cautious with how they structure such a consent so that when the deal falls apart they have their rights protected. Tenants should also correctly structure transactions so as to avoid or reduce potential future exposure.

Liability Under Assignments

When executing a lease, a landlord and tenant develop what is referred to as privity of estate (a relationship based on the tenant’s occupancy of the landlord’s property) and privity of contract (a relationship based on the contract that is entered into between the landlord and the tenant). The liability of a tenant, any assignee, and any subtenant varies depending on whether privity of estate and/or privity of contract exists between the various parties. At the onset of the lease, the landlord can go after the tenant for any covenants that “run with the land” (e.g. any covenant that is intertwined with the possessor of the premises) based on privity of estate, and the landlord can go after the tenant for any personal covenants (e.g. covenants that are personal to the original tenant) based on privity of contract.

Once the tenant assigns its leasehold interest to an assignee, the tenant no longer has the right to occupy its premises and therefore no longer has privity of estate with the landlord. However, unless the landlord expressly releases the original tenant from its obligations under the lease, privity of contract continues to exist between the landlord and the tenant. The landlord can pursue all remedies set forth in the lease against the original tenant based on a violation of the original contract terms.

When the original tenant assigns its leasehold interest to its assignee, the assignee occupies the premises and therefore establishes privity of estate with the landlord. The landlord can therefore go after the assignee if any of the covenants that run with the land are violated including the payment of rent and taxes, the obligation to repair the premises, and many other covenants contained in the lease. However, unless the assignee expressly assumes all obligations under the lease, the assignee is not liable for a breach of any personal covenant. The assignee’s liability will also end (absent the existence of fraud) once the assignee assigns the leasehold interest to a third party as privity of estate will end. Such an assignment is especially problematic if the financial strength of the assignee is stronger than both the original tenant and the new assignee, which is usually the case. Note also that the result is the same regardless if the lease contains restrictions on or prohibitions of assignments without the landlord’s consent.

As for the original tenant, it can recover damages it owes to the landlord from the assignee, but such damages are limited. As stated above, the assignee is not liable for personal covenants contained in the lease unless it has specifically assumed them. The original tenant also does not have the right to re-enter the premises and evict the assignee unless it specifically reserves such a right in the assignment document.

Liability Under Subleases

A sublease does not affect the relationship of a landlord and its tenant. Privity of estate and privity of contract continue to exist between the landlord and the tenant as if no sublease had been entered into. The landlord can continue to pursue all remedies set forth in the lease against its tenant regardless of the existence of the sublease.

The landlord’s rights are more limited in a sublease scenario vis-à-vis a subtenant. No privity of estate or privity of contract exists between a landlord and a subtenant so the landlord has no right to seek damages from a subtenant. A landlord does have the right to terminate the prime lease if any covenant set forth in the prime lease is violated, and such a termination will automatically terminate the sublease. The landlord therefore has just as much control over the premises in a sublease as in an assignment, but it does not have as many sources of potential funds to recoup damages.

The tenant under the prime lease, however, has more rights under a sublease scenario. The sublease is treated like a lease between the prime tenant and the subtenant, and the prime tenant will generally reserve remedies under the sublease including the right to terminate the sublease, the right for damages, and the right to evict the subtenant upon the occurrence of a default. A sublease is therefore far more beneficial to the prime tenant.

The Name of the Instrument

Note that courts will not recognize the label of the instrument attempting to create an assignment or a sublease and will analyze the conveyance to determine the nature of the relationship. If a tenant attempts to sublease some or all of its premises for the remaining portion of the term of the lease, the law will treat such a sublease as an assignment of the lease as it applies to that portion of the premises. The prime tenant will lose most, if not all, of the remedies that are set forth in the sublease and may not be able to evict its subtenant from its premises upon the occurrence of a default.

If a tenant attempts to assign the lease, but holds a reversionary interest (e.g. if the assignee is obligated to assign the lease back to the original tenant a day before the expiration of the prime lease), the law will treat such an assignment as a sublease. Such a relationship will benefit the prime tenant, but the landlord will lose the right to go after the assignee as the assignee will be treated as a subtenant of the original tenant.

Going Forward

Landlords should be cognizant of ways to minimize their risk. Before consenting to any assignment or sublease, landlords should confirm that the relationship is as it purports to be. A landlord should condition any consent to an assignment upon the original tenant remaining liable under the lease and upon the assignee expressly assuming all covenants under the lease. Prior to consenting to any sublease, the landlord should confirm that there are sufficient safeguards in place so that the landlord will have adequate assets from which to draw upon if a default occurs, and should further consider requiring that the subtenant enter into an assumption agreement with the landlord under which the subtenant assumes the obligations under the prime lease.

Tenants should also consider the potential ramifications of the structure of their assignment or sublease, and should find ways to reduce their risk. Tenants should obtain a release from the landlord in connection with any assignment, and should include assumption language in any assignment document where the assignee assumes all covenants under the lease. They should also retain a reversionary interest in any premises that they sublease so that they do not inadvertently create an assignment.

Finally, both landlords and tenants should consider consulting a real estate attorney before entering into either of these transactions. Far too often tenants and landlords create a potentially catastrophic scenario that could have been avoided if they would have engaged a qualified attorney.

DISCLAIMER: These articles are to be used for general information purposes only, not as a substitute for in-person evaluations. The information contained herein is not legal advice and no attorney-client relationship is formed through these articles.