Qualified Tenant

Hello landlords and tenants I’m going to discuss what a “qualified tenant” is and what that means in commercial real estate leasing. My name is Jenna Zebrowski and I am the attorney behind LawByJZ.com. Landlord might let the tenant sublease or assign a commercial lease, but that assignment or sublease will generally depend on the financial strength of the potential new tenant, as well as other qualifications, such as use or hours of operation.

The landlord usually has the ability to define what the qualified tenant criteria is. If you’re trying to get someone else to take over the lease, you want to know that the landlord will approve the new tenant.

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Commercial Real Estate Case Study

Qualified Tenants: What Makes Them That Way?

David’s company was looking to cut costs after a tough year financially. They found a smaller space that was going to cost less rent. Their current location was very desirable, although more expensive than their current budget allowed, so they were looking for another tenant that wanted to take over the space and pay the rent.  Rental rates had gone up since they had negotiated their lease, so the rental rate was competitive for the area.

David’s company had a larger net worth at the time they signed the lease, than at the time they decided to downsize their space and started the search for the replacement tenant. They found the replacement tenant who was able to take over the payments and was in better financial shape then their company was at the time. They provided all of the documents that the landlord required, and were surprised when the landlord said they new tenant wasn’t qualified as a replacement!

David’s company called up the attorney that negotiated the lease, including the provision about subleasing the space to another tenant. The criteria for a qualified tenant to replace David’s company was right there in the lease, it wasn’t an arbitrary set of criteria that the landlord could change. 

The lease stated that the net worth of the replacement tenant had to be the same or greater to the net worth of David’s company. David’s company had a larger net worth when they signed the lease originally, but it was smaller a few years later, and the replacement tenant actually had greater net worth than David’s company at the time, but it wasn’t quite as large as the net worth of David’s company at the time the lease was signed. 

When David’s attorney worked with the landlord, the landlord realized that he couldn’t disqualify the tenant based on their net worth, and in fact would probably benefit from having a happy, rent-paying tenant in the space instead of an unhappy tenant that might get behind on rent payments they couldn’t continue to afford.

The landlord approved the replacement tenant as a qualified tenant. David’s company was able to get into the right sized office at the right cost, and the new tenant was able to take over the lease in a perfect place for them. The replacement tenant qualified after a careful analysis of the lease language.