Most leases include a prohibition against the transfer of the lease (whether by assignment of the lease or sublease of the premises) without the landlord’s prior written consent. Be wary that a change in voting control of a corporate tenant is often considered a transfer and requires the landlord’s prior consent. Time is often a factor when leases are being transferred, so the lease should contain language that the landlord’s consent cannot be unreasonably withheld or delayed. The landlord’s consent should also not be dependent on meeting unreasonable conditions. For example, the transferee’s financial condition should not have to be stronger than the current tenant’s nor should personal guarantees be required if the proposed transferee’s financial condition is strong and if no personal guarantees were obtained from the original tenant. Depending on the tenant’s negotiating strength, it may be able to include language stating that if the landlord’s response is not received within a certain period of time, then consent is deemed to be given.
In addition, the tenant should try and negotiate exclusions from the obligation to obtain the landlord’s consent for certain transfers such as transfers to a related person, to a franchisee and to a purchaser of all or substantially all of the assets of the tenant or the majority shares in the capital stock of the tenant.
Standard form leases often require the tenant to pay for all costs incurred by the landlord in considering any transfer requests. The tenant should ensure that such costs are limited to the reasonable costs actually incurred by the landlord in reviewing and approving the transfer, and should, if possible, try to have the costs capped at a certain amount.
Tenants should try and negotiate a release from the landlord upon the completion of a transfer. If a release is not obtained, the tenant will continue to be responsible for all covenants and obligations (including the obligation to pay rent) after the lease has been transferred. In the event that the transferee defaults in paying rent when due, the landlord would have the right to require the original tenant to pay the rent even though the original tenant no longer has any benefit or control of the lease or the leased space.
For a discussion of additional items relating to commercial leasing from the tenant’s perspective, please click here.
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