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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.