Landlord overreach in commercial lease assignments

First time commercial tenants are often intimidated by the verbiage of commercial leases.  Unlike typical commercial contracts the language is alarmingly one-sided.  Commercial tenants typically do not have the regulatory protections granted to residential tenants.  They are presumed to have greater business acumen than residential tenants and must therefore peruse lease language throughly.  Many landlords rely on form leases which sometimes contain over-broad language that can have unintended consequences.

An example comes from lease language that seeks to capture any consideration paid to to the tenant for assigning the lease or subletting the property.  On its face this is reasonable.  The landlord owns the property and should recieve the rental income earned from it.  But in an attempt to prevent the tenant from finding loopholes, the lease language sometimes overreaches.  Some leases close out  the section adressing consideration paid by sublessee or assignee to the tenant with language similar to that below:

If Tenant sells the business being operated at the Premises (either directly or indirectly, including, without limitation by way of selling, assigning and/or transferring control of Tenant), to an entity or person not controlled by or under common control with Tenant, then Tenant shall pay to Landlord, at the time of the closing of such sale, an amount equal to twenty percent (20%) of the gross sales price.

Alternatively, the consideration for the sale of business is included in the definition of consideration received from assignee or sublessee.

And just like that a sentence snuck into an otherwise innocent provision appears to give the landlord rights to 20% of the value of the tenant’s business.  Even worse, if the tenant operates multiple locations the landlord for this one location is claiming 20% of the total sales proceeds of the tenant’s entire business.

I have yet to come across a landlord who tried to justify this language and objected to its deletion.  However, the language above highlights the necessity of tenants reviewing their leases thoroughly before executing them.

If you have any questions about the above or your commercial leases please contact us.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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