Don’t Forget to Address Transfer of LLC Interests in Lease
Assignments can work in both a commercial property owner’s and tenant’s favor in certain circumstances. But there also are times when an assignment could be harmful. For example, if you’ve found a tenant that’s perfect for your retail space, but because of the synergy you’ve created among tenants at the shopping center, it’s crucial that this tenant mustn’t assign its lease to any type of business that deviates from what it is selling. There is a way you can protect yourself in the lease.
You should deem the tenant’s transfer of LLC interests as an assignment. While during negotiations with such a tenant, you and your attorney are probably drafting an assignment clause that controls to a large degree to whom the tenant can assign its lease, and under what circumstances you have to agree to this, there’s an often-overlooked assignment limit that can come back to bite you later if you don’t include it. Reining in the tenant’s transfer of limited liability company (LLC) interests when it comes to assignments is crucial.
Make Provisions Comprehensive
One of the main reasons you’ll want to control the tenant’s assignment clause is to help you avoid getting stuck with an undesirable assignee that either ruins your synergy or violates other tenants’ rights, such as exclusives. Typically, an assignment clause will list many situations that will be considered an assignment. It’s always a smart idea to require the tenant to get your prior consent to an assignment. But if your lease’s assignment clause—especially if it’s part of an older lease—doesn’t make a transfer of capital stock or a partnership interest by the tenant to another party fall under the assignment label, that’s a problem.
You might already be susceptible to this problem if your other tenants have older leases. The assignment clause in many older leases assumes that a tenant that’s not an individual is either a corporation or partnership. It doesn’t address the possibility that the tenant is, or may become, an LLC. So the assignment clause doesn’t list the transfer of interests in an LLC (known as “membership” interests) in the list of transfers considered to be an assignment.
As a result, you can’t stop the tenant from transferring its membership interest to another party. And you’re forced to accept the new party that takes over, even though it might be radically different from the one that signed the lease. But you do have some control over this during negotiations and drafting. And you have some control during renegotiations with other tenants, so remember to address this issue during renewals and renegotiations at the center.
Use Specific Language
To avoid this scenario, say in the lease that any transfer of any membership interests will also be considered an assignment. This should force the tenant to follow your assignment procedures (such as getting your consent) before the transfer of the membership interests can occur. Ask your attorney about including the following language in your assignment clause where it lists the types of transfers that are deemed to be an assignment:
Model Lease Language
(x) A transfer of any ownership interest in Tenant (whether stock, partnership interest, membership interest, or otherwise)
But be sure your lease language includes a catchall phrase—here “or otherwise”—to cover any other types of business interest transfers that aren’t specifically listed. Including such a catchall should protect you if any new types of business entities are created in the future.