The transferability of a commercial property lease can have a direct impact on the potential sale of a brick and mortar business enterprise.
Most commercial leases contain restrictions on the tenant’s power to freely transfer or assign the interest in a lease. These restrictions are necessary for the protection of the landlord, providing assurance that any successor of the business and the lease has the financial and legal wherewithal to pay the rent.
In rare cases, the lease may expressly prohibit a tenant’s right to transfer. See California Civil Code 1995.230.
Where the lease does not include any language prohibiting or restricting a tenant’s right to transfer, the tenant retains an unrestricted right to transfer. See California Civil Code 1995.210.
Leases that contain restrictions on tenant transfer may require the landlord’s consent subject to express conditions or standards. These conditions could include:
- Does transferee have an acceptable business reputation?
- Will transferee use the space in a manner that is consistent with landlord’s expectations and local zoning/use laws?
- Is the transferee in good financial standing?
Should the lease contain restrictions on tenant transfer but provide no standard or condition for withholding consent, the transferability is subject to the implied standard that the landlord’s consent may not be unreasonably withheld. Where the landlord withholds consent but upon written request from tenant, provides no grounds for reasonable objection to the transfer, the transfer may be allowed. See California Civ. Code 1995.260.
A well drafted lease balances the interests of landlord and tenant and protects the interests of all parties from the onset, during the transition of ownership, and beyond. A diligent review by your attorney of a new or existing lease is money well invested.
Don Ross is a business broker in Exit Strategies Group’s North San Francisco Bay Area office. For further information or help selling a business contact Don at 707-778-0210 or firstname.lastname@example.org.