Lease assignment tug-of-war
Topics: Lease assignment provisions, permitted transfers, negotiating lease assignment approvals
In today’s solo episode, Chris tackles assignment provisions in commercial leases, which allow tenants to sell their business to other entities.
What You’ll Learn
- What are the two types of lease assignments?
- What are the goals of landlords vs. tenants when negotiating lease assignments?
- What is a permitted transfer? When are they applicable?
- What are current trends with lease assignments?
About Retail Retold
The Retail Retold Podcast highlights community retailer stories from across the country and gives a behind-the-scenes perspective from business leaders in both retail and real estate industries. The show’s episodes contain valuable insights that help solve the needs of entrepreneurs and real estate pros. Join host Chris Ressa weekly for amazing insights and thought-provoking stories.
Transcript:
Chris Ressa 00:00
This is Retail Retold, the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa. And I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC Management.
Chris Ressa 00:18
Hey everyone, welcome to retail retold, I’m your host, Chris Ressa. And thank you for listening in today.
Chris Ressa 00:27
So, no interview today, just me, but wanted to talk about a topic that I think, in my opinion has not been talked about a lot and has changed a lot, maybe not contractually, but has changed from a, you know, a perception since the pandemic, a provision that I don’t think gets talked about a lot in a commercial lease and gets looked over a lot. And that provision is the assignment provision.
Chris Ressa 01:07
So I’m not gonna give some legal definition. But for those who don’t know, the assignment provision is the provision in a lease that allows a tenant to sell their business to another entity.
Chris Ressa 01:25
So there are a couple of things with this provision. One, it’s usually bucketed with the sublease provision, where a tenant doesn’t sell their business and a new tenant take over. Rather, they take the space and they lease that out to somebody else. And that’s not the provision that I want to focus on today. The sublease piece, I think that is less challenging.
Chris Ressa 02:03
Typically, when you see commercial lease, you’ll either see it listed assignment, or it might be called transfer provision. And so typically, the provision is, tenant wants the ability, right, invested time, dollars, and grew a business and wants to be able to sell their business. A landlord wants certain rights and approvals, because they want to control what tenants are at their property, right, commercial real estate is an investment that is backed by the underlying users of that real estate. I didn’t say credit for a reason, I said users, and I’ll get to that in a second.
Chris Ressa 03:09
And so I think, I think any rational person could see both sides of this, right? A tenant wants to be able to freely sell their business and a landlord wants, you know, the ability to control who’s in their property, both makes sense. So how do we get to the finish line, I think is, you know, always something that’s important.
Chris Ressa 03:42
Some tenants have the ability, or even tell the landlord, like, the point of this is to grow this, to scale this because I do want to sell, right, that’s how I’m going to monetize the position.
Chris Ressa 03:58
That’s typically a bit easier if they’ve got visibility on that to deal with. And you can, you know, attorneys can craft something to deal with that. But other times, it’s just the tenant wants the right. So what you’ll typically find, and where I think the you know, the really the conversations are starting to happen with tenants and landlords is the concept of the permitted transfer.
Chris Ressa 04:37
Permitted transfer basically means, well, let me back up, there are certain transfers that are in some tenants eyes non-negotiable, and they’re permitted without consent of the landlord. Let’s call it if a company sells all the stock of a company to somebody else, right? If you’re the landlord of Amazon or Walmart, right If you’re, as a landlord, you’re not gonna be able to get in the way of that type of transaction and say, no you can’t do this in this location.
Chris Ressa
So there’s typically some, what I would call, in today’s environment, you know, some standards where kind of the world doesn’t matter, the market is kind of accepted that, yeah, there’s some level of permitted transfers, for sale, the company all the stock, blah, blah, blah. Now, I think there is a difference, when it’s a company that’s doing that, or if they are only selling a certain number of stores, well, then it starts to, right, they might not sell the entire chain might only be a certain number of stores, I think there’s a difference if it was a tenant who doesn’t have the balance sheet of, you know, an international multinational company.
Chris Ressa 06:09
And this is where there’s some nuance in the assignment provision, and it could get complicated and be pages and pages in the lease. And because I think the big rub is that after the basic, call it sale at an entire company, something like it. Amazon, Walmart, Target someone like that. The reality is that landlords have created a mix of the property, a credit instrument, and gotten familiar with the user, and if that’s going to change, want to level an approval.
Chris Ressa 07:04
And so what are some of the things that get done? Right, so some of the typical things you’ll see is, if,
you know, is there more, so I think a landlord would say, like, sell the whole company? Fine. You don’t, you have to come to us for approval. And usually, that approval can’t be, you know, the landlord has to be reasonable. So, if a new entity came that had the same credit worthiness, the same use, right, because they were, if someone was just buying the company to get to the real estate, they could change the use of the premises, that could be problematic for the landlord. So typically, you know, the next step might be, you know, permitted transfer would be sale, someone who has the same level of experience, similar use, similar or significant balance sheet.
Chris Ressa 08:05
So I would say, you know, that gets negotiated. But that’s, you know, that’s becoming more common in permitted transfers. And then you would have in the retail side commercial real estate, you know, the next thing would be operational experience, I think that’s a big one that gets, you know, I would say gets, you know, downplayed all too often, because there’s a landlord, they want the next user to be successful. And so, if someone you know, from Wall Street, retired and was a gazillionaire and decided to buy, you know, 100 store retail chain, but no retail experience, I think that, you know, that’s not the same as if some, you know, other existing retail chain acquired someone, and it should be treated differently. So typically, there’s an operating experience piece to it, they have a certain number of stores, so that landlords know, that they’re getting someone who’s in the retail business, is a merchant, knows how to run stores. But I will tell you, generally speaking, more and more, this provision is the same in very few leases. We all like to think that we’ve kind of set the standard, but I think it’s getting really interesting is the word I’ll use because it’s changing frequently.
Chris Ressa 09:58
Tenants are looking for more flexibility and landlords are looking for more control. Right? retailers want the ability to react to market conditions quickly, without having to get an approval from somebody and landlords want to make an investment in a deal, and know that they have that investment, and know that it’s with the group that they did the deal with. I think that that’s really for the big chain stores, I think on the local side.
Chris Ressa 10:39
This is getting, I think we’re all going to be seeing more assignments. And so I was just gonna say what I said in the beginning is it’s becoming more and more is because the world of assignments is increasing. So why is the world of assignments increasing? Well, it’s very simple. There’s a lack of retail space out there. And so if there’s a lack of retail space, one of the ways that people can scale up quickly, is by acquiring businesses that already have space and secured the real estate. If you’re a small business owner, and you have five stores, well, to get to 20, could take you longer than you might have thought, longer than it would have been, in you know, call it 2015. Because there was more space available for you to go into markets and open new locations. Well, since there’s a lack of space, we’re seeing more and more assignments.
Chris Ressa 11:50
Because people are out there looking to acquire businesses. So this is something that we’re having to deal with more and more. And I think that people are going to continue to have to deal with more and more because at the end of the day, there’s not more space coming available. So it could be a win for a landlord and it could be a not-so-good scenario for a landlord depending on who the acquirer is. So, I think it’s something that everyone should get familiar with a lot more than they are today. Because I suspect that assignments and transfers are only going to pick up and deciding as a tenant, what flexibility you need. And as a landlord, what control you need, is super important. And just like everything else, I’m not sure there’s really a market stance on it anymore. I think this is changing deal to deal. And that makes it interesting. So we are going to see more assignments. That’s the prediction for me. And so I think it’s something you should get your arms around. Alright everyone. Thanks so much. Hope you enjoyed this episode. Stay tuned. More interviews are coming and look forward to talking to you about the next topic.
13:23
Thank you for listening to retail retold. If you want to share a story about a retail real estate deal that you were a part of on our show. Please reach out to us at retail retold at DLC mgmt.com This show highlights the stories behind the deals from all perspectives. So it doesn’t matter if you are a retailer, broker, entrepreneur, architect or an attorney. Also, don’t forget to subscribe to retail retold so you don’t miss out on next Thursday’s episode