A lease agreement can be full of harmless looking language that, on review, doesn’t seem concerning. It can even appear problematic on the face of it, but you are advised that it “doesn’t apply to you” or is a right the landlord is unlikely to exercise. This is often how “consideration” language in the assignment clause of a lease is handled; but recent trends demonstrate that all tenants looking to sell their business during the term of their lease have reason to be worried.
The assignment clause of a lease deals with the ability to transfer the lease from the tenant to a third party. It will typically grant that ability with certain restrictions. While many retail or office tenants might not be concerned about this clause, it is critical for a dentist, because most dentists will want to sell their practice, retire, and will need to transfer the lease to the purchaser of their practice. Frequently, assignment clauses will include language dealing with the payment of excess “consideration” to the landlord in connection with a transfer. Typically, a landlord is most concerned here with being paid any excess rent that the Tenant receives from a subtenant, when a tenant is seeking to profit off of the sublease by charging the subtenant a higher rent than the tenant pays. However, “consideration” can be broadly interpreted, and many leases indicate that this includes any money paid to the tenant in connection with the value of the space itself. This is concerning, since typically the sale price of a practice will include some allocation of funds for the fact that the tenant is in a built-out office. Does this mean that the landlord can start taking part of the proceeds of the sale of the tenant’s business?
We have recently observed that some of Canada’s largest landlords are starting to request their share of the tenant’s sale proceeds under their view of the “consideration” clause. One particular landlord has, for the last few years, sent out a standard assignment letter to tenants when they request a transfer of their lease, which indicates that a percentage of the tenant’s sale proceeds is owed to them upon the date of the assignment. Another landlord has, quite recently, begun reviewing the purchase and sale agreements between a vendor and a buyer, in order to determine if “consideration” is to be paid to them, and has, in at least one instance, determined that the tenant must pay them a portion of the sale proceeds. With dwindling occupancy rates and increasing rental defaults, landlords are becoming more creative with the ways they can make money, and this would appear to be part of this trend. It should concern any tenant with such a clause in their lease who intends to sell their business.
Cirrus Consulting Group has for many years advised clients to have this section of their lease amended, to carve out an exception for the proceeds of the sale of their practice, if not to strike the clause altogether. The good news for tenants is that we have had success with amending this clause, and we push back on landlords who demand these funds at the time of assignment. It is another reason why a tenant should engage a professional to negotiate their lease; the hidden language in your lease could cost you tens if not hundreds of thousands of dollars.
About the Author
Cameron Bryant
I am an Associate Lawyer and Lease Negotiator with Cirrus Consulting Group, conducting lease negotiations on behalf of medical and dental professionals across Canada. I completed my articles at Blake, Cassels & Graydon LLP, and received my Juris Doctor from Osgoode Hall Law School in June 2013. Before attending law school, I graduated with Distinction from the University of Western Ontario, where I earned an Honours Bachelor of Arts Specialization in History.
