How To Spot Key Elements in a Commercial Lease: Transfers & Assignments in Commercial Leases

 Hey everybody, Joseph Gozlan with Eureka Business Group. And today we’re back to our series of videos talking about spotting key elements in your commercial lease. And today we’re going to talk about a certain clause called lease transfers and lease assignments. Most of the contracts we see in retail have that clause in it.

And the very base reason for that is As a business owner, I might want to exit someday. I might want to say, you know what? I’ve done well. My business is successful. I’m ready to capitalize on that success. And I want to sell my business to somebody else that will take it even further. What does that mean?

It means that when I sell, I want to transfer that lease because that lease is part of my business assets. It’s something that I worked hard for. Sometimes I spent tens, if not hundreds of thousands of dollars in improving the space. For example, if I’m a restaurant, I probably installed a vent hood and a grease trap and all these kinds of stuff.

So I want to make sure that the lease that I signed today is an asset for me as part of my sale of the business. It’s an asset I have value in that I’m going to sell and sometimes even make money off of. So what does that mean? It means that my contract needs to say that even though me, Joseph or my business, one, two, three LLC signs, this is the contract.

But I’m allowed to transfer it to somebody else or assign the lease for that matter. So that’s a very important clause. Now let’s talk about the unfortunate side of the business. Sometimes small businesses close and if nobody wants to think about it up front, but when it does happen, you need to have a way to get out of your lease without breaking it and having financial consequences.

Closing a business down is not a good experience anyways, so adding on top of it, the stress of having to be financially responsible for the next three years, five years, 10 years, however long that lease is in place is not something you want to add on yourself. So having the ability to transfer or assign the lease to somebody else could get you out of that lease without the financial consequences.

So as usual in these videos, we’ll talk about the tenant side and then we’re going to talk about the landlord side of things. So from the tenant’s perspective, like I said, it’s important to be able to assign the lease, whether it’s because I’m selling the business or because I’m closing down the business.

Either way, I want to be able to assign it over. And it’s important that I have the right to do it. It’s important for me to understand under what circumstances the landlord is going to allow that. And it’s important that there’s going to be a language in there that says that the landlord cannot reject the transfer.

Unreasonably. What is unreasonably? So you, we cannot expect the landlord to say, yeah, sure. Just bring anybody off the street and I’m going to let you assign the lease to them. We’ll transfer the lease to them. The landlord is always going to want to make sure that whoever takes the lease from me is as strong or stronger financially than what I was when I signed the lease because they agreed to a certain tenant profile.

Sometimes they will have restrictions in terms of the business usage, just like your lease business is going to have business usage in it. Sometimes they’re going to make sure that the tenant that is coming in is going to have the same usage as your business. Or this can be a amendment as long as it doesn’t impact the other tenant in the shopping center.

We also have to make sure that there are, or there are not any other terms in this thing that we’re not ready for or we’re not aware of. Reading your assignment and transfer clause is very important, and make sure you customize it to your business. Customize it to your plans. If you know that this is location number 10 of your business, and your plan is to sell all 10 locations in the next 3 years, then you’re The importance of what happens when you sell the business is great.

It’s super important for you to understand the language in there and make sure it enables your exit in three years, even though the lease might be for five or 10 years. Now we’re going to do a little switch over and talk about the landlord side of things, at least transfer, or at least assignment from the tenant to somebody else can happen.

It’s something that we have to agree and recognize that is part of life in business. And especially if you own a shopping center, if you own a single tenant, it’s a different conversation, but in a shopping center, it’s inevitable. It will happen to you as a landlord, at least once or twice in your whole period of the shopping center.

So what’s important for you as the landlord in this thing, it’s important for you to know who is coming in and taking over the lease. It’s important for you to decide, are you releasing the original leaseholder from the responsibility or do they keep their personal guarantee? Even though they sold the business, you have to decide what conditions do you approve or not approve?

You have to make sure that your interest in your property doesn’t get impacted and your property value doesn’t get diminished because the tenant has to Do that lease transfer. It’s also important for you to look at this from the perspective of your plans for the shopping center or your plans for your property.

Am I gearing up for a refi? Am I gearing up for a sale? What is allowed? What is not allowed? Am I clear on the usage restrictions in that lease? And if you don’t know what I’m talking about, when I say usage restrictions, check out the link below, because we had created a video just about restriction usage.

In your commercial lead. So as a landlord, I have a very great importance for that clause of transfer and assignment. And it’s very important that we maintain control over who and what kind of business is moving in instead of the tenant that is moving out. That’s it for today. My name is Joseph. I’m with Eureka Business Group.

We are retail experts from the Dallas Fort Worth market. And if you need anything retail, whether you are a landlord, a tenant, or a retail director from a major brand, reach out to us. We can help you with anything retail in the Dallas Fort Worth market. And if you feel we missed anything in this video, or you have more questions about commercial leases, leave us a comment below and we’ll be happy to create new videos.