Don’t Get Locked in When Granting Tenants Sublease/Assignment Processing Fee Concessions

A veteran New York City leasing attorney and long-time Insider board member recently reached out to share an idea for a new clause that, while short and sweet, can save landlords a lot of money and also maximize their flexibility to build good will with or reward current tenants for referring a new tenant, providing professional services on a discounted basis, or undertaking any other positive action that serves the landlord’s interests. The reward is allowing the tenant to enter into a sublease or assignment with a third party without having to pay the landlord the standard processing fees the lease requires. 

While the underlying business arrangement may be a win-win, the legal fallout may be a win-lose for the landlord. That’s why landlords need the kind of clause the NYC attorney is recommending to protect their interests. Here’s a quick briefing on the strategy along with model language for a sublease/assignment consent form that you can adapt to implement it.

The Importance of Processing Fees

The rights of tenants to transfer their lease interests to third parties is a fundamental principle of property law. However, landlords also have rights in ensuring that proposed sublessees and assignees are suitable occupants for the building. To reconcile these interests, most leases require tenants to notify and get the landlord’s consent to sublease or assign their lease. The landlord is allowed to review the sublease/assignment but may not withhold consent if the deal is reasonable. To implement this arrangement, the tenant must provide the landlord notice and a copy of the proposed agreement along with other reasonable information that the landlord needs to perform due diligence on the would-be sublessee or assignee. 

The problem with this dynamic is that reviewing proposed assignments and subleases may create administrative burdens for landlords. “A sublease doesn’t produce a new rent stream for the landlord since the lease to which the sublease is subject doesn’t change,” the NYC attorney explains. So, determining whether to grant consent to these arrangements may divert resources that the landlord’s office could have otherwise used to generate new business or advance rent-producing deals.  

That’s why many commercial leases require tenants to pay some kind of processing fee, such as $5,000. In addition to compensating the landlord for its time and effort, processing fees incentivize tenants to screen their own prospective sublessees and assignees and deter them from proposing dubious arrangements to which the landlord is unlikely to consent. (To find out how to negotiate and create a processing fees lease clause, see Charge Tenants a Fee for Processing Their Assignment & Sublet Requests)

The Risks of Waiving the Processing Fee

Although it protects the landlord’s financial interests, there may also be an occasion where it makes sense to reduce or even waive the processing fee on a particular sublease or assignment. Such largesse can help you:

• Build good will with a current tenant;
• Reward or incentivize a tenant for taking some kind of action to help your business; and/or
• Persuade a tenant to allow you to do something that may otherwise go against its own interests, such as lease to a store that sells merchandise subject to the tenant’s current exclusive. 

The operative word in the above sentence is “occasion.” If you determine that the occasion calls for granting a tenant a break on processing fees, you need to be sure that the accommodation is recognized as nothing more than a one-time occurrence. The danger is that tenants will perceive, or at least contend, that the concession is actually a precedent, custom, or course of dealing between the parties. In effect, the tenant will claim that in eliminating or reducing the fee for that one transaction, you waived your right to receive the full processing fee for future subleases and assignments. 

Don’t let tenants punish you for your own good deeds! To avoid getting locked into future concessions that you neither want nor intend to make, add the following caveat language to the Sublease/Assignment Consent form when cutting tenants a one-time break on processing fees:

Model Language

Landlord agrees that solely as a one-time courtesy to Tenant, Landlord hereby waives, for this Sublease only, the $_________ review and processing fee referenced in Section _____ of the Lease. In no event shall the limited concession by Landlord under this Section constitute or operate as a course of dealing by, a precedent upon, or a custom of, Landlord affecting any future sublease transactions under the Lease. 

With that protective language, you need not fear that a costly precedent has been established which will haunt you for years to come.