When you are selling your business, keep in mind that a handful of third parties may have the ability to delay the sale and extract expensive concessions in order to allow the sale to proceed. Your landlord immediately comes to mind. In most transactions, your landlord will not share your enthusiasm or sense of urgency when you are attempting to sell your business and assign the lease to a third party. Potential problems are best addressed before you sign the lease. This is when you have the most leverage. Failing that, we recommend involving the landlord early on in the process. The landlord is not the person you contact two days before you plan to close.
Lease Assignment and Examples of Potential Issues
A. Worst Case Scenario. In the worst case, the lease assignment will provide the landlord with the absolute right to reject the proposed assignment or sublease, terminate your lease and take back your space. Typically, this might happen in a booming real estate market with rent increasing much higher than what was originally planned for in your lease. In this situation, while not ideal, amending the lease to bring it inline with the current market solves the problem. Afterall, the landlord makes money when the property is rented.
B. Landlord Won’t Release Buyer. Leases frequently provide that lease assignments do not release the original tenant of its obligations under the lease or any personal guaranty. Under this scenario, you as the seller will remain as a guarantor of the buyer’s lease for years after the sale. Approaching your landlord with a proposed lease assignment in hand is not the ideal time to ask your landlord to ignore this provision. Before you sign your lease is when you try and delete this provision. Alternatively you can offer the landlord a compromise that your obligation as the seller will burn off after one year if the buyer complies with all of its lease obligations without default.
Minimize the Landlord’s Ability to Disrupt the Transaction
At Anderson Leavitt, we help you at the beginning because we understand the business life cycle. As we hope you have surmised, the theme here is to address these issues when you have the most leverage. This is before you sign the lease or other key business contract. To the extent possible, our business attorneys will try and minimize the landlord’s ability to subjectively refuse a proposed assignment. For example:
A. Failure to Respond. Many leases provide that the assignor may assign the agreement upon written consent of the landlord which will not be unreasonably withheld. For this reason, we ask for deemed consent if the landlord fails to respond within ten days after written notice.
B. Change in Control. Frequently the sale of substantially all of a company’s assets or more than fifty percent of a company in a stock sale will be deemed a change in control and treated as an assignment that requires consent. The alternative objective standard is to require no consent where the buyer has substantially the same tangible net worth as the seller and intends to continue the seller’s business.
The scenarios we discussed are what a practical business minded lawyer considers when representing his or her clients. Assignment provisions are not boilerplate clauses whether they appear in a lease or key vendor supply contract. At Anderson Leavitt, we take great pride in our business minded approach and consider not only what happens at the onset but also down the road and your eventual exit.
If you have any questions regarding your commercial lease or key vendor contracts, or any other aspect of your business, please feel free to contact any of our business attorneys at Anderson Leavitt.
This entry is presented for informational purposes only and is not intended to constitute legal advice.