Don't Overlook Tenant's Transfer of LLC Interests When Limiting Assignments

Like most smart owners, you probably have a lease that includes an assignment clause that lets you tightly control the tenant's ability to assign the lease. T+hat can help you avoid getting stuck with an undesirable assignee. Typically, an assignment clause will list many situations—including a transfer of capital stock or a partnership interest by the tenant to another party—that will be considered an assignment. And the clause may require the tenant to get your prior consent to an assignment.

But if your lease's assignment clause is like many we've seen—especially if it's in an older lease—it may have a loophole that could let an important transfer of an interest in the tenant to another party escape the assignment label. Here's the loophole: 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, a limited liability company (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.

The 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.

Add Membership Interest Transfers to Lease

To plug this loophole, say in the lease that any transfer of any membership interests will also be considered an assignment, says Washington, D.C., attorney Desmond D. Connall Jr. This should force the tenant to follow your assignment procedures (such as getting your consent) before the transfer of the membership interests can occur, he explains.

Add Model Language

To plug this loophole, Connall recommends adding the following underlined language to your lease's assignment clause where it lists the types of transfers that are deemed to be an assignment CLLI0034:

Model Lease Language

(x) A transfer of any ownership interest in Tenant (whether stock, partnership interest, membership interest, or otherwise)…

Practical Pointer: Be sure your lease language includes a catchall phrase to cover any other types of business interest transfers that aren't specifically listed, Connall says. Our Model Lease Language includes the phrase “or otherwise” for this reason. Including such a catchall should protect you if any new types of business entities are created in the future, he explains.

CLLI Source

Desmond D. Connall Jr.: Member, Womble Carlyle Sandridge & Rice, PLLC, 1401 Eye St. NW, Ste. 700, Washington, DC 20005; (202) 857-4403; DConnall@wcsr.com.