obligations under the lease. There is little Washington caselaw directly on this issue, but consider the Court’s statements in Glessner v. Balholm, 50 Wash. App. 1, 747 P.2d 475 (1987) (emphasis added):
It is generally true that where a lease contains a renewal clause, and the renewal option is exercised by an assignee of the lessee, the lessee remains liable on his lease covenants absent modifications resulting in a new lease. [Citations omitted.] However, the lessor and assignee may establish a new tenancy relationship and thereby terminate the old, either by entering into a direct leasing arrangement . [Citations omitted.] When such new tenancy relationship is established, the assignor is no longer liable.
It is unclear whether the statement with respect to “varying materially the terms of the original lease” was meant to be limited to those flowing from an exercise of an option to renew a lease. Also see, Rhodes v. Gould, 19 Wash. App. 437, 576 P.2d 914 (1978).
To avoid this unintended result, the landlord may have the lease state that any modification of the lease after an assignment does NOT release the tenant from its lease obligations. For an example of a lease clause with this effect, see the attached Exhibit D, and a separate Landlord Consent to Assignment with this effect, see the attached Exhibit L. Landlord may want to ensure this effect regardless of whether tenant has received notice of the intended modification (this, after all, should be the assignee’s requirement not the Landlord’s). For even more certainty, the landlord could require the assigning tenant to execute a separate guarantee of the assigned lease. A savvy tenant may require that it be held only to the original lease requirements (e.g., not rent increases). Exhibit D also provides samples of such compromises.
6.Dealing with the Changing Economy
6.1Up Markets: Profits and Recapture Clauses. Suppose that the Tenant has the right under the lease to sublet or assign and, at the time it decides to sublet or assign, market rents have increased? The parties may want to decide in the lease who is entitled to the upside profit of sublease or assignment rents.
From the landlord’s perspective, she makes a living speculating on real estate and so should be the one to profit from a sublease/assignment in an up market. Furthermore, she’s the one who’s taken the risk on the building and should be the one to profit from it. If she agrees to share sublease/assignment profits with the tenant, she will want to be sure that her percentage share of the profits includes all form of consideration for the sublease or assignment (e.g., lump sum payment in addition to monthly rent). For a sample clause allocating profits to the landlord, see Exhibit E.
The tenant, of course, would prefer to keep all of the sublease/assignment profits. He may argue that without at least a percentage share of the profits, there is little incentive for him to sublet or assign in an up market. The tenant will want to be sure that before there is any split of profits with landlord, his costs of subletting are first subtracted from profits. The parties may carefully negotiate the items that tenant may subtract prior to the split. Costs that the tenant may want subtracted from sublease/assignment profits before such profits are shared with or transferred to the landlord include the following: