Advanced Leasing Strategies: Transfers to Affiliates (“Permitted Transfers”) – A Simple Solution
Insights Derek A. Ridgway · May 31, 2023
It’s time to peel back the layers and reveal the core of the proverbial “Permitted Transfer” clause. Oftentimes this clause is so over-lawyered that neither party can decipher what it means in practical terms. Knowing the “pain points” of the parties leads to a simple solution. Here’s how:
- Landlord’s View: As a basic principle, a landlord must have the ability to choose who occupies their building. A landlord desires to have a tenant that is compatible with other occupants in the building and is credit-worthy – having a balance sheet sufficient to meet the lease obligations. If you press against any of these “pain points”, you will meet strong resistance.
- Tenant’s View: In contrast, sophisticated tenants these days need to have the flexibility to bring on investors, to reorganize the company, to assign or sublease to affiliates, to “go public” (IPO), and to sell their assets or stock, free of any landlord approval rights. In fact, it’s insulting to a tenant to suggest that landlord would have “a say” in any of these basic rights.
- Simple Solution: Can these views co-exist? YES
- Compatibility: Landlord’s desire to have compatible tenants is not jeopardized by these basic tenant rights, because the company itself doesn’t change. There are some rare exceptions (e.g. where specific “affiliates” or “competitors” are of concern). However, these exceptions may be carved out of the clause, if necessary. Compatibility should not be a significant obstacle.
- No Change in Net Worth: As long as the lease requires that the tenant (and the transferee) have an aggregate tangible net worth equal to or greater than what the tenant had as of the effective date of the transfer, there is no measurable change in the credit-worthiness of the tenant. Landlord is in exactly the same (or better) financial position after the transfer.
- No Release of Tenant: Of course, if the tenant survives the transfer, it must remain the primary obligor under the lease. Simply put, tenant may not avoid its obligations under the lease by transferring the lease to another entity.
- Prior Notice, but not Consent: Prior notice must be given to the landlord to keep the landlord informed of the pending transfer. There may be exceptions where disclosure is restricted by third party non-disclosure obligations.
- No Subterfuge: Tenant may not reorganize in bad faith for the purposes of avoiding its obligations under the lease.
Next time your clients are arguing over permitted transfer language, consider using these points to align their views. Or better yet, include some of these points in your next LOI. It’s not a zero-sum question. Both parties can win if their pain points are adequately addressed.
Derek A. Ridgway is a seasoned commercial real estate attorney with more than 25 years of experience. He is a Partner in Rimon’s San Francisco and Menlo Park offices. His clients look to him for advice in all aspects of real estate, leasing, business and construction transactions. Read more about Derek.
Rimon has 47 offices across five continents. The firm is widely known as being at the vanguard of legal innovation. The firm has been repeatedly recognized by the Financial Times as one of North America’s most innovative law firms. The firm’s Managing Partners were both named ‘Legal Rebels’ by the American Bar Association’s ABA Journal and have spoken on innovations in the practice of law at Harvard and Stanford Law Schools. Rimon and its lawyers have also received numerous awards for excellence, including from Best Lawyers and Chambers.