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By Sadaf Behdin
June 10, 2024
Restrictions on Transfers
California law generally favors the right to transfer interests in property. To that end, it’s no surprise that courts liberally interpret transfer provisions in commercial leases. Any ambiguity regarding a tenant’s ability to transfer its interest in a lease will be construed in favor of transferability. Even more, if a lease is silent on a tenant’s transfer rights, the default interpretation under the California Civil Code is that the tenant has unrestricted transfer rights under the lease. On the other hand, contractual restrictions on the alienability of leasehold interests are permitted. Specifically, express lease provisions that condition, restrict or even prohibit a tenant’s right to assign the lease or sublet the premises are generally enforceable. Accordingly, when drafting or negotiating transfer provisions in a lease, it is crucial to expressly identify the circumstances and conditions under which the tenant may assign the lease or sublet the premises (if any at all).
Consent Conditions
Most transfer provisions in commercial leases require the landlord’s consent. Landlords typically want to retain as much control as possible when it comes to who will step into the shoes of the existing tenant—this is especially true in retail settings. As you can imagine, a retail landlord needs enough flexibility to select the types of businesses that enter into its shopping center to generate maximum foot traffic and ensure the success of other tenants in the shopping center. It is also important to note that a transferee must comply with any use restriction under the lease and that a transfer does not alter the permitted use.
When a landlord’s consent is required, often the landlord is willing to include language stating the landlord “will not unreasonably withhold consent”. It is good practice when drafting transfer provisions to specify under what circumstances withholding consent is deemed “reasonable”. Some examples include the following:
- The transferee’s use of the premises is not consistent with the permitted use.
- The transferee lacks sufficient business, reputation, character, or experience to operate a successful business from the premises.
- The proposed transfer would cause a violation of another existing lease.
- The transferee does not have a net worth equal to or greater than the original tenant’s net worth at the time of the proposed transfer.
Permitted Transfers
When representing a tenant, consider including scenarios where the landlord’s consent is not required. This is typically referred to in leases as “Permitted Transfers”. Sophisticated tenants often want the flexibility to reorganize their company without the landlord’s involvement. As such, depending on the type of tenant, the landlord will often agree to narrow circumstances where the tenant has unfettered transfer rights. Permitted Transfers in leases often include transfers to (i) an entity controlling, controlled by or under common control with the tenant, (ii) an entity related to tenant by merger, consolidation or reorganization or (iii) a purchaser of all or substantially all of the tenant’s assets as a going concern.
Prudent Practices
Although the idea of transferring a lease may not always be at the forefront of the minds of the parties at the conception of a lease, it is important to keep future considerations in mind. Landlords will want to ensure that they retain as much control as possible when it comes to who steps into the shoes of the original tenant. Tenants will want to ensure the lease provides enough flexibility for them to pursue their business objectives or, at least, the option to do so. Given the intricacies, transfer provisions should be given significant thought to protect each party’s present and future interests.
Our office is prepared to help landlords and tenants negotiate transfer provisions in commercial leases and advise on all considerations related to the same. For more information, please contact Sadaf Behdin at sbehdin@hechtsolberg.com or Márcia Loeffelholz at mloeffelholz@hechtsolberg.com. Either can be reached at (619) 239-3444.