Transfer rights under a commercial lease agreement
One important clause to be negotiated in a commercial lease agreement is the transfer right clause. It can materially restrict the tenant’s ability to sell its business or its interest in the leasehold interest. Today’s blog post will examine the circumstances in which a tenant can obtain a transfer right, the forms of transfer, and the grounds for landlord to withhold its consent to transfer.
A transfer right is the right of a tenant to transfer possession of the property to another party. Tenants could exercise this right through different means such as assignment, sublease, property sharing, and even an outright sale.
Most lease agreements place restrictions on the tenant’s rights to transfer because the landlord accepted the lease terms with the tenant’s unique risk profile in mind. In such cases, the tenant would need landlord’s approval to engage in any form of transfer. Generally, such approval must not be “unreasonably withheld”, subject to modification of this standard by what’s in the lease agreement.
Forms of transfer
Tenants may exercise their transfer rights in a variety of ways:
An assignment: This is where a tenant transfers its absolute rights under a lease to another party.
A sublease: This is where a tenant transfers a part of the property to the sublessee. In this situation, the tenant becomes a “sublandlord” over the sublessee.
Property sharing: In this case, the tenant allows a third party to use the property along with the tenant.
Transferring control: As the name suggests, here, the tenant transfers its ownership interest to another party, usually from the sale of the tenant’s business. It is similar to an assignment of a lease.
The parties need to designate the process for requesting consent and responding to the same. This should be done through written communication to prevent any misunderstanding. The lease agreement should clearly state the time within which the landlord is to respond.
Tenants can also negotiate instances where the landlord’s consent can be dispensed with, like in cases where the transfer is to an affiliate of the tenant company. These “permitted transfers” should be spelt out clearly to avoid possible disputes.
There is no hard and fast rule on what would constitute reasonable for the landlord to withhold its consent. It will be depend on the particular facts of the case. For example, in the case of the subtenant refusing to submit a credit report, the court found the landlord’s refusal to sublet was reasonable. This is because it was essential to know the financial health of the sublessee (Digalakis v. Fred T. Reisman & Associates Ltd - unreported November 21, 1991). Landlords should also be wary of refusing consent unreasonably, as this may result in payment of damages to the tenant.
Transfer rights can be a delicate aspect of the lease agreement and may sometimes cause friction between the landlord and tenant if its terms are not clear. Parties should therefore consult an experienced real estate lawyer to review the terms of the transfer provision.
For any questions or advice on drafting a lease agreement, please don’t hesitate to contact Northview Law at 905-857-4890 or follow this link to book a free consultation.