by Antonella Talarico and Cory Sherman
In changing economic times, it is essential for retail tenants to redevelop their strategies and goals, as well as reevaluate their focus as a company in order to remain current and successful. The typical commercial lease, however, imposes numerous restrictions on the Tenant that could hinder, prevent, or even delay the Tenant in achieving end goals. Therefore, the Tenant must be diligent in negotiating a Lease that creates enough flexibility to allow the Tenant to achieve its ever-evolving needs. In a commercial lease the Transfer provision is one of several clauses which must be given proper attention and consideration during the Tenant’s negotiations.
When negotiating the Transfer provision in its Lease, the Tenant should take into consideration the following:
A. Restrictions and Conditions Imposed by the Landlord
1. Landlord’s Termination Right
- Recommendation: The Landlord’s right to terminate the lease should be deleted or have no application in specific circumstances.
- Alternatively, the Tenant should ensure that it is provided an opportunity to withdraw its request for consent to the Transfer.
- Tenant must also specify that the Landlord’s termination right has no application for Transfers where the Landlord’s consent is not required.
2. Conditions on Landlord’s Consent
- Recommendation: Conditions the Landlord has the ability to impose on the granting of consent to the Transfer should be listed directly in the Lease.
- The conditions listed in the Lease should only apply in circumstances where the Landlord’s consent to the Transfer is required.
- Tenant should delete or modify any condition which results in the Tenant relinquishing any rights or concessions that have been negotiated in the Lease.
- Renewal rights and exclusives must not be nullified by a Transfer as these rights are negotiated terms of the Lease which should be permitted to flow through the Transfer and be available to the Transferee, unless these provisions are specifically identified as personal to the Tenant during negotiations of these terms.
- Landlord should be prevented from deleting any amendments made to the Landlord’s standard form lease.
- Allowing the Landlord to claw back the rights and amendments negotiated by the Tenant will reduce the value and marketability of the Lease for the Tenant and result in the Lease being unattractive to any potential Transferee.
3. Increase in Basic Rent
- Recommendation: Any increase in Basic Rent should be deleted or limited to the average of the aggregate of Basic Rent and Percentage Rent payable by the Tenant during the last two years.
- The increase of Basic Rent should not be based on the fair market rent for the Premises as the calculation of the increase on this basis could result in a substantial increase in Basic Rent if the Lease has a lengthy term with heavily negotiated rental rates, or because of the changing economic times.
4. Release of the Tenant’s Liability Under the Lease
- Recommendation: The Tenant should obtain a release from the Landlord on a Transfer or, in the alternative, limit its liability to the then current Term the Lease (ie excluding future renewals).
- The Landlord may agree to the Tenant’s release on the condition that the Transferee has a certain net worth and additional covenants are provided by the Transferee.
5. Amounts payable on a Transfer
- Recommendation: Payment of funds to the Landlord on a Transfer should be itemized and capped where possible.
- In terms of paying to the Landlord any consideration received for the Transfer, the Tenant should ensure that excluded from the value of such consideration are amounts allocated to the Tenant’s interest in leasehold improvements, Tenant’s business goodwill and legal and brokerage fees.
- With respect to any excess rent that may be collected by the Tenant on a sublease, the Tenant must insist that royalty fees and franchise fees be excluded from what is considered excess rent under the Lease.
- It is important that the amount of the Landlord’s administration fee and other costs be either specifically given a value in the Lease or in the alternative capped at a certain amount.
B. Exclusions to the Requirement for Landlord’s Consent
- Recommendation: The Tenant should negotiate exclusions from the requirement to obtain the Landlord’s consent to Transfers.
- While the Lease will prohibit the Tenant from transferring the Lease without the consent of the Landlord, in order to achieve the flexibility required to change the Tenant’s business structure the Tenant should insist that the following types of Transfers not require the Landlord’s consent: (i) an assignment to any holding body corporate, subsidiary body corporate or affiliate of the Tenant; (ii) an assignment to a corporation formed as a result of a merger or amalgamation of the Tenant with another corporation(s); (iii) an acquirer of the majority of the Tenant’s locations operating under the same business name; (iv) an acquirer of the majority of the Tenant’s shares; (v) a recognized lending institution as collateral security for the financing of the Tenant’s fixtures and equipment; and (vi) franchisee, licensee or concessionaire.
- In addition, the Tenant should ensure that any restrictions or conditions which a Landlord is permitted to impose on the Transfer not apply in the case of a Transfer where the Landlord’s consent is not required.
- If the Tenant is or intends to become a public corporation, the Tenant will need to ensure that a Transfer is not triggered upon the issuing of shares or the sale and purchase of shares on a recognized stock exchange.
- If the Tenant is a family run business, the Tenant should ensure that a transfer of shares by way of bequest or among family members, which may be required for estate planning purposes, does not require the Landlord’s consent.
- If the Tenant is a sole proprietor and the Lease is in the name of an individual, the Tenant should ensure that they are permitted to incorporate a company and assign the lease to that corporation, where the Tenant wishes to do the same for tax reasons or to limit their personal exposure.
When reviewing the Transfer provision in the Lease, it is essential that the Tenant take into consideration the type of entity which it operates as well as any future plans that it may have in order to ensure that the Tenant negotiates a Transfer provision which suits their business plan and meets their ever growing needs.