In general, a party setting up shop for a business usually intends to stay there for longer than a few months, and commercial leases often extend much longer than a typical 1-year residential lease. But, of course, small businesses and startups go out of business all the time (as do their larger counterparts), and once there is no more business to be run, there is no need for continuing the lease. Short of business termination, a business might have any number of reasons for trying to get out of the obligations of a lease (upsizing, downsizing, location change, etc.) and one of the most common tactics a tenant will pursue is trying to get another party to assume the obligations of the lease by assigning the lease to that third party. Which will of course, mean that the commercial landlord is dealing with a whole new party; instead of a copy shop or accountant’s firm, a daycare facility or pet store might move in which radically changes the situation. Which leads to the question of whether a commercial landlord in California can prevent a tenant from assigning the lease.
Does the Lease Have a Prohibition Clause?
Many leases contain prohibitions on assignment of a lease, but not all prohibitions on assignments are written to say exactly the same thing. For example, some assignment prohibition clauses will absolutely prohibit assignments while others might put conditions on assigning such as requiring approval by the landlord.
While California courts are more favorable to tenants in the context of residential leases, landlords are given more power in the context of commercial leases. Under California CIV § 1995.210, a lease may include a restriction on the transfer of the lease. Furthermore, under CIV § 1995.230, such a prohibition may “absolutely prohibit transfer.” That said, under CIV § 1995.220, “An ambiguity in a restriction on transfer of a tenant’s interest in a lease shall be construed in favor of transferability.”
Putting this all together, if the lease makes a clear statement that assignment is prohibited, then a court will uphold that prohibition, but if a restriction on transferability is somewhat ambiguous, the court may favor the tenant in allowing the assignment.
What if the Lease Gives the Landlord Discretion to Approve the Assignment?
Again, many leases contain assignment provisions which do allow for assignment but only when the landlord approves the assignment. If no standard is provided in the clause for when the landlord will and will not consent to an assignment, then, under CIV § 1995.260, such consent may not be “unreasonably withheld” by the landlord. Whether the landlord is unreasonably withholding consent to a proposed assignment is a question of fact that the parties may have to litigate, and the burden will be on the tenant to prove that the landlord acted unreasonably in withholding consent.
In addition, the parties can include a term in the commercial lease which restricts assignment unless certain conditions are met, such as providing a certain amount of notice before an assignment is allowed.
When the Lease Contains No Prohibition on Assignments
Although most boilerplate leases will contain an assignment clause, the parties may have negotiated so as not to include such a clause or simply created a lease on their own without an assignment clause. In such cases, the tenant will generally have the right to assign its obligations under the lease.
After an assignment, however, the original tenant can remain liable to the landlord for rent if the new tenant fails to follow through on its rent obligations (although the original tenant can pursue legal action to recover the rents paid), unless the landlord releases that original tenant from its obligations under the lease through a novation.
Work With an Experienced Los Angeles Real Estate Attorney
Attorney Laine T. Wagenseller of the Wagenseller Law Firm has published numerous articles on real estate law and works with individuals and businesses across Southern California in resolving real estate matters, including lease matters that result in litigation. Contact the Wagenseller Law Firm today to schedule a consultation.