ARTICLE
6 September 2023

What To Know About Commercial Leasing In Different States: Part 2

KL
KI Legal

Contributor

KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services fall under three broad-based practice group areas: Transactions, Litigation, and General Counsel. Its extensive client base is primarily made up of restaurant and hospitality owners and operators, real estate developers and family offices, and lending institutions and investment funds.
One major lease provision that is often heavily negotiated is a tenant's right to assign its interest in the lease.
United States Real Estate and Construction
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As mentioned in a previous article – "What to Know About Commercial Leasing in Different States" – it is important that a tenant be conscious of the state in which they are signing a commercial lease. Different states have different laws and standards when it comes to key lease provisions as well as the construction and interpretation of the lease itself. This article will continue to discuss another important difference that you may find in a lease depending on the state in which the lease is entered into in.

Assigning a Lease

One major lease provision that is often heavily negotiated is a tenant's right to assign its interest in the lease. When a tenant assigns its interest in a lease, the tenant is giving over to the party assuming (i) said interest, (ii) all of the tenant's rights, and (iii) obligations under the lease. For example, if John assigns his lease over to Paul, and Paul assumes the lease, Paul will now be obligated to make rent payments under the lease, and Paul will have the right to occupy the premises. Usually, landlord's do not expressly grant tenants the unfettered right to assign the lease. The reason is quite simple; when a landlord agrees to lease a space to a tenant, the landlord is doing so largely based on the landlord's belief that the tenant can make the required rent payments under the lease, is a reputable tenant and will hopefully not default under the terms of the lease. If the landlord would freely give a tenant the right to assign a lease, the new tenant could potentially be a business or person that is unable to make payments, or a tenant that the landlord just does not trust. Therefore, landlords will often restrict a tenant's right to assign a lease without the landlord's prior written consent.

What Happens if the Lease is Silent with regard to Assigning the Lease?

This question is extremely unlikely to ever happen, but if it does, the answer will vary based on the state in which the premises are located. In California and most states, if a lease is silent on the tenant's right to assign, the tenant may freely assign the lease to another party. Furthermore, if there is an ambiguity in a California lease pertaining to a restriction on transfer, the courts will construe the ambiguity in favor of allowing the transfer.

States do differ, however, where there is a restriction on assigning the lease unless landlord's consent is obtained, but the lease is silent on the type of consent the landlord has (meaning whether landlord needs to act reasonably). In California the courts will likely interpret the lease to require the landlord not to unreasonably withhold such consent; this is a very tenant friendly way to interpret a lease and not all states take the same approach. The laws in Minnesota differ from those in California. Unlike in California where the courts will likely interpret a lease so that landlord's consent cannot be unreasonably withheld (in the event the lease does not expressly provide the "consent standard"), the same does not go for Minnesota. In Minnesota if there is no standard in the lease for a landlord's consent; the landlord can withhold the consent for any reason whatsoever.

The above is another example of the differences in state law when it comes to leasing in general. When looking for a new space and negotiating a lease, it is important to be represented by an attorney who understands the specific laws of the state in which the premises are located in.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
6 September 2023

What To Know About Commercial Leasing In Different States: Part 2

United States Real Estate and Construction

Contributor

KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services fall under three broad-based practice group areas: Transactions, Litigation, and General Counsel. Its extensive client base is primarily made up of restaurant and hospitality owners and operators, real estate developers and family offices, and lending institutions and investment funds.
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