Commercial real estate lease assignments in M&A transactions: An underestimated deal killer
Written by attorney Eric Kilchenstein
Published: New Hampshire Union Leader
Much like, say, underestimating the time it takes to write a modest article and then having to write it from the rum bar of one’s hotel in Key West while on vacation (hey, the ocean view and mojitos are a plus), the time and complexity in obtaining lease assignments is an underrated unforced error.
From large to small transactions, lease assignments are an oft-underappreciated detail not given the attention until the 11th hour. The risk of unforeseen lease assignment issues can be mitigated by some fairly simple measures by businesses and their counsel.
Of course, the easiest way to mitigate lease assignments chilling a deal is at the lease drafting and negotiation stage. The typical assignment clause in a lease are pro-landlord. At best, most clauses simply state the landlord’s consent to a lease assignment must not be “unreasonably withheld, denied or delayed” with an occasional mandate on the landlord’s response time.
Business owners and their counsel need to contemplate the future when negotiating assignment clauses. Consider terms that do not require consent at all, such as changes of control to employees, family, etc., among many other possibilities. Beyond the permitted transfers concept, above, consider negotiating guardrails on “unreasonable” nonconsent.
Seasoned landlord counsel will not allow too many constraints but often will allow for just enough language that will give your client leverage when it is time to sell. For example, I have had success with adding fairly extensive language as to a landlord being deemed “reasonable” in consenting to assignment when the assignee meets certain thresholds, either in combination or alone, such as: years of business operation, net worth of principals (avoid this as a standalone to allow for startups), licensure of principals (particularly to allow for health care lease assignees) and credit worthiness / financing worthiness by measure of institutional lenders.
When not having the benefit of a favorable lease assignment, the most prudent course is to get in front of lease assignments with the same gusto that is given other due diligence items. Immediately identify the language and included mechanisms of each lease in which the deal requires a lease assignment.
On the sell-side, have your ducks lined up: Review leases to make sure adequate term is left, operating expense information is accurate and timely etc. On the buy-side, also get lease info as soon as possible, get signed copies of leases and scrutinize them asap. With obvious deference to confidentiality concerns (consider NDAs for amenable landlords) get the landlord involved asap.
Everyone likes notice of important matters, including corporate landlords when it comes to the possible sale of their tenant’s business.
As mentioned, most assignments give the landlord great deference to the issuance of consent so prepare the persuasive case to the landlord ahead of time including: i) the objective, i.e. getting the financials of the assignee ready but frame the M&A activity in the best light and ii) the subjective, i.e. make the case to the landlord that deal issuing the assignment is good for them.
In short, akin to writing articles close to deadline from vacation, delay with attending to lease assignments is an unforced error.