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Page 4 — Property Management Quarterly — July 2017
Legal
COLLIERS INTERNATIONAL MANAGEMENT?
COLLIERS INTERNATIONAL
4643 S. Ulster Street, Suite 1000 · Denver, Colorado 80237
303 745 5800
Why
OWNER
Trusted by Owners:
Same Clients for Over 21 Years
New Assignments
Every Year
Over 12M Square Feet
35 Satisfied Owners
TENANT
Trusted by Tenants:
98% Retention of
Management After Sale
Over 600
Satisfied Tenants
High Percentage of
Renewals
Because we create value.
Trust
Reliability
Commitment
Integrity
O wners should have rea-
sonable expectations that
their tenants will follow
and adhere to the lease
provisions regarding lease
assignments and subleases. Unfor-
tunately, that is not always the case.
Often, the first notice a property
manager receives from a tenant is
a request for new signage or new
access cards. That is a red flag that
there is a potential change occur-
ring in the leasehold estate that
must be addressed by the property
manager and reported to owner-
ship. Another red flag: Rent is paid
by a different entity then the actual
tenant.
As each lease template is differ-
ent, a thorough review of the appli-
cable lease provisions by the prop-
erty manager with owner’s legal
counsel is the absolute starting
point. The following are questions
and answers that may improve our
understanding when an assignment
or sublease is being considered.
• Sessions: What is the difference
between an assignment and sub-
lease?
• Halstead: A sublease is a lease of
a tenant’s space from the tenant. A
sublease can be for all or part of the
premises and for all or part of the
balance of a lease term. In contrast
to an assignment, where a tenant
assigns all of its rights and obliga-
tions under a lease, under a sublease
the tenant assigns certain rights and
obligations while retaining others.
Unlike a sublease, which is approved
by a landlord, an assignment usu-
ally is accomplished through an
agreement between the tenant, the
assignee and the landlord.
This distinction
is important as the
assignment creates
privity of contract
with the landlord
and assignee, giv-
ing the landlord
rights against an
assignee it may
not have against a
sublessee.
• Sessions: Why
should an owner
care to have proper
documentation?
• Halstead: It is
important that a sublease or assign-
ment be properly documented for
a variety of reasons. A landlord
should, at all times, be aware of
who is occupying and operating
from the leased premises. By way
of example, a landlord will want to
confirm that the party or parties
occupying the leased premises are
carrying the requisite insurance and
that the landlord has been named
as an additional insured. Moreover,
in the event of a default, the land-
lord will want to know who to pro-
vide notice to and, should it become
necessary, who to evict and/or sue
for damages.
• Sessions: What can possibly go
wrong?
• Halstead: How long do you have,
Steve? But seriously, it’s not uncom-
mon for tenants to assign or sub-
lease spaces without providing a
landlord with notice. This can cre-
ate a host of issues, particularly if
there is a casualty at the property
and insurance carriers become
involved. An unauthorized occupant
may not carry the proper insurance,
name the landlord
as an additional
insured or have
included a waiver
of subrogation in
its policy.
Moreover,
with no contract
between the sub-
lessee or assignee,
the landlord may
not be afforded
the protections set
forth in the lease.
The original ten-
ant would have a
duty to indemnify
the landlord from claims arising in
connection with an unauthorized
assignment or sublease, but the
duty to indemnify is only as strong
as the original tenant’s financial
condition.
• Sessions: What due diligence is
required for an owner to approve an
assignment or sublease?
• Halstead: An owner should evalu-
ate a proposed assignee or subles-
see in a manner consistent with its
evaluation of the original tenant.
By way of example, a landlord
should request a few years’ worth
of tax returns, a sworn financial
statement and bank statements. If
the proposed assignee or subles-
see is an entity, the landlord should
also review the governing docu-
ments for the entity and financials
for the principals of the entity. A
landlord also may want to consider
the business experience of the pro-
posed assignee or sublessee. The
financial strength of a proposed
assignee or sublessee and any addi-
tional guarantors may carry more or
less weight depending on the finan-
cial strength of the original tenant
and guarantors, and whether the
original tenant and guarantors will
remain liable for the lease obliga-
tions.
• Sessions: Who is liable for pay-
ment of rent?
• Halstead: I’ll give you the clas-
sic attorney response, “It depends.”
It depends on how the assignment
and/or sublease are drafted. Gener-
ally, in the case of a sublease, the
sublessee pays the tenant and the
tenant pays the landlord. In a typi-
cal sublease, there is no privity of
contract between the sublessee and
landlord. Consequently, the land-
lord’s right of recovery is limited to
the original tenant. This can create
issues if the tenant accepts money
from the subtenant but doesn’t ten-
der the money to the landlord.
Almost always, in the case of an
assignment, the assignee pays the
landlord directly. A typical assign-
ment will require that the original
tenant and guarantors remain liable
for some period of time after the
assignment and that the original
tenant and the assignee shall be
jointly and severally liable for the
lease obligations. In such case, the
landlord could recover from both
the original tenant and assignee.
• Sessions: Have you seen any
favorable outcomes?
• Halstead: An assignment or sub-
lease could provide the landlord with
more pockets to collect from in the
event of a default. In some cases, the
landlord ends up with a stronger ten-
ant for a longer period of time.
Steven S.
Sessions
CEO, Sessions
Group LLC, Denver
Amanda H.
Halstead
Member, Mills,
Schmitz, Halstead,
Zaloudek LLC,
Denver