Commercial leases often require tenants who are selling or refinancing their companies to obtain landlord consent prior to transfers, assignments or sublets. But not all "Transfer, Assignment or Sublet" clauses are created equally. And giving a landlord too broad an approval right for changes in control can create headaches for commercial tenants—including lost business opportunities, or even lost lease rights. Here's how to avoid a common trap.
Background
Many commercial tenants have leases that require them to obtain consent from their landlord for any proposed changes in their ownership structure. Some of these leases even allow the landlord to take back the space merely upon receipt of a request for consent. Failure to obtain a landlord's consent may constitute a lease default. What's more, even with the landlord's consent, the company can lose valuable rights, like renewal options, rent abatements, security deposits and more. For restaurants especially, where lease location can have a huge impact on revenue stream, having to obtain the landlord's consent can make or break the business.
Many restaurant operators think that a landlord's approval is only needed when you assign or sublease the restaurant location to a third party. Assignments or subleases usually involve giving your space to someone else, and it's common sense that landlords should have the right to choose who is using their property. Most leases say that the tenant must obtain their landlord's written consent prior to transferring the lease to someone else. In general, as long as the landlord consents in a reasonable manner, most tenants are fine with that requirement.
However, while the consent requirement makes sense when the tenant is an individual person, a potential trap arises when the tenant is a corporation, limited liability company (LLC), or partnership: in these latter cases, landlords often add a so-called "change of control" restriction on the ownership of the tenant entity. The goal of the "change of control" provision is to prevent a transfer to a tenant that may have the same company name—but have a totally different ownership group. From the landlord's point of view, a new ownership group may have a poor reputation, inadequate financials, or for other reasons be unacceptable.
Worse, some landlords want total control of which new ownership group can control a restaurant's location. Their lease forms may have definitions of transfers, assignments and subleases that are so broad that the landlord ends up with the right to consent to (and control) any and all changes in ownership, structure, and control of the tenant or their parent entity and affiliates, and many contain restrictions on the tenant's rights following a change of control event. Some even allow the landlord to cancel the lease.
Avoiding the "change of control" trap
Here are three tips for restaurant and other commercial tenants:
- When you review the lease assignment and sublet provisions, make sure to review any change of control provisions to determine whether they have restrictions on ownership changes in your entity and affiliates. If they do, try to negotiate exceptions that will allow you to grow, restructure and ultimately sell your company without undue interference from the landlord.
- Make sure your attorney is familiar with your current organizational structure, at both the tenant level and at the affiliate and parent levels. That way, your attorney can help you evaluate any unintended indirect consequences of the change of control provision.
- Consider whether any renewal options or other rights would be lost in the event of an assignment, sublet or change of control situation, and negotiate additional protections for those rights.
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