To protect against this risk, the landlord may specify in the lease that a transfer of some portion of the stock or partnership interests (e.g., 50%) in the tenant, along with other corporate transactions such as mergers, constitutes an assignment that triggers Landlord’s various approval rights. These rights and the rights described in the following Section 1.7 are typically negotiated hand-in-hand. For a sample clause declaring certain transfers of ownership to be an assignment, see Exhibit C.
1.7Permitted Transfers. Some leases will provide specific conditions under which a tenant may assign or sublet the premises landlord’s consent. While some leases, in particular ground leases, may convey unfettered rights on the tenant to sublet or assign, a tenant is normally allowed to transfer the lease without consent only to certain related entities.
For example, a corporate tenant may envision selling its business, which would require a transfer of the lease. In this circumstance, the tenant might want the landlord to agree that the tenant can assign the lease to any entity that acquires all of tenant’s assets. Otherwise, the tenant would be forced to get landlord’s consent to the sale of tenant’s business, a decision that most organizations want to make on their own. Or, a corporate tenant might want the flexibility to transfer between related entities (e.g., to a subsidiary or a parent corporation). Again, the tenant doesn’t want the landlord to have veto rights over these transactions. Some landlords may agree to such free transfers but require prior notice or a written agreement by the tenant and the transferee that both parties are jointly and severally responsible under the lease. Of course, as discussed in Section 1.6, the landlord needs to weigh this request against the risk that a tenant might use such rights to evade the lease restrictions on assignment and subleasing. Careful drafting can mitigate this problem.
The landlord may choose to limit the tenant’s permitted transfer right by allowing the tenant to assign or sublet the premises to a permitted transferee without consent only so long as the tenant is not in default and/or has not been in default prior to the transfer. Such language confers landlord the option to void an assignment of the lease by tenant to a permitted transferee if the tenant is in default and fails to obtain landlord’s consent. Bellevue Square Managers, Inc. v. GRS Clothing, Inc., 124 Wash. App. 238, 98 P.3d 498 (2004). Landlords may also want to restrict permitted transfers to ones that result in a tenant entity of sufficient net worth. For several examples of ways to write a permitted transfer clause, see Exhibit B.
1.8The Overlooked Use Clause. The use clause may not cross the parties’ minds in the course of negotiating the tenant’s assignment and subletting rights. However, this clause– which sets forth the allowable purposes for which Tenant may use the space – has important repercussions for a tenant’s ability to sublet or assign the space.
Consider, for example, the following two use clauses in a commercial lease:
Sample 1. Tenant may use the Premises for any purpose.
Sample 2. Tenant may use the Premises solely for the purposes of marketing three-quarter (.75) inch widgets in Siberia via telephone solicitation.