In most office lease agreements, landlord consent is required for tenant transfers such as subleasing or assignments. There are a few exceptions where it might not be. One is “Permitted Transfers.” This is where a tenant can sell their business, bring on another business partner, or sublease the space to an affiliated entity without landlord consent. Another common exception is “Permitted Users.” This is where the tenant allows clients or partners to use the space – again without landlord consent. If you’re the owner of an office building, you must protect your property. The only way to do this is to have lease provisions in place that impose safeguards on any tenant transfer not requiring landlord consent.
Don’t Risk Your Property & Reputation
Most commercial landlords have a screening process in place when considering prospective office tenants. They may look at financial statements and/or tax returns, perform a business credit check or ask for a business plan if it’s a new business, run a criminal background check or check court records, rental histories, etc.
This is why you can’t run the risk of an outside party suddenly becoming your tenant without landlord consent. You have no way of knowing if their financials or business reputation are worse than the tenant you approved. What if their business or business practices differ from the original tenant? What once seemed like a safe stream of rental income could very well damage the reputation and value of your building.
How Landlords Should Protect Themselves
It all comes down to drafting the right kind of lease. When it comes to “Permitted Transfers”, lease terms need to specifically state transferees must meet financial requirements and engage in business that doesn’t harm or damage the building’s value or reputation. Language within the lease agreement should state the landlord must be notified of any permitted transfer so there’s ample opportunity to verify these conditions are met.
The lease agreement should also ensure the original tenant is not absolved of liability in the event of a permitted transfer. If their business doesn’t survive, for instance, if it’s bought out or merges with another company, verbiage should state the surviving entity must meet financial and reputation requirements.
In regard to “Permitted Users”, restrictions should be placed into the lease limiting the amount of space a permitted user can use within the leased premises. A narrow definition of permitted users should also be included. For example, permitted users can be defined as a tenant’s clients or partners the tenant is actively working with. Stated disqualifications should include any business with a reputation that could diminish the property’s value as well as any existing or prospective tenant. A landlord doesn’t want to be competing against one of its own tenants for a lease renewal or prospective new tenant.
For additional protections, the lease should bound permitted users to the same lease terms applicable to the tenant. It should also be stated the permitted user is the tenant’s liability.
What Commercial Landlords Need to Watch For
Admittedly, tenants can be sneaky. Regardless of lease terms, there’s always the risk a tenant will do whatever they want or try to slide something by you. Even with a signed lease agreement that seemingly covers everything, a third party could occupy the space anyway.
This is why commercial landlords must stay vigilant when it comes to keeping an eye on potentially sketchy situations. These include:
- Identifying Anyone New Seen Regularly in the Tenant’s Space
- Any Changes to the Tenant’s Business/Company Name or Signage
- Rent Payments Paid By Any New Entity
H.W. Holmes, Inc. reminds you that this post is for informational purposes only. As a L.A. area commercial construction company, we encourage you to seek legitimate legal counsel if you need further advice or counsel on tenant transfers or lease agreements.