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Successful Business Exit Strategies – Assignability Of Key Commercial Contracts

On Behalf of | Jun 18, 2024 | Commercial Real Estate Law

Selling your business in Philadelphia involves navigating numerous complex commercial real estate challenges, particularly when it comes to lease assignments. Third parties, especially your commercial landlord, can significantly impact the sale process by potentially causing delays and demanding costly concessions. 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, when you have the most leverage. Following that, we recommend involving the landlord early on in the process. Waiting until the last minute to discuss a lease assignment with your landlord has the potential to jeopardize your entire business sale.

Understanding Commercial Lease Assignments in Pennsylvania: Process & Potential Issues

A common solution for dealing with your business’s current commercial lease is to assign it to a third party. Unlike subletting the property, where your business remains the tenant on the lease, assigning the lease removes you from the equation entirely. The third-party business takes over as tenant with all the rights and obligations contained in the lease and Pennsylvania law.

An assignable contract is a way for a party to the agreement to remove themselves without terminating or breaching the contract. Instead, another party takes over the original party’s position within the agreement. In the real estate context, a tenant in a commercial space might be able to assign their lease to another business looking for a place to operate. This can free your business from a lease that has become impractical, too costly or a poor value, and give you greater flexibility in adapting your premises to your current needs.

However, this is only possible if the terms of the lease do not specifically forbid assignment. Also, assignment of the lease generally requires the landlord’s consent, which can lead to complications.

Landlord Rejection and Market Changes – 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 in line with the current market solves the problem. After all, the landlord makes money when the property is rented.

Protecting Sellers from Future Obligations – 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.

 

Expert Strategies for Successful Commercial Lease Assignments in Philadelphia

At Anderson Leavitt, we specialize in Philadelphia commercial real estate law and business exit strategies. Our experienced attorneys understand the full business lifecycle and focus on proactive lease negotiation. We emphasize addressing critical issues like lease assignments when you have maximum leverage – typically before signing any commercial lease or key business contract. Our goal is to protect your interests by minimizing a landlord’s ability to arbitrarily refuse proposed lease assignments. This strategic approach helps ensure smooth business transitions and successful exits. Some key strategies we employ include:

Negotiating Landlord Response Times in Lease Assignment Clauses – 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.

Navigating Change in Control Provisions in Commercial Lease Assignments – 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.

These are just a few scenarios a practical, business-minded lawyer considers when representing their 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 beginning but also down the road and your eventual exit.

 

Questions about Philadelphia business law?

Whether you have any questions regarding your commercial lease, key vendor contracts, selling a business or any other aspect of your business, reach out to any of our business attorneys at Anderson Leavitt or connect with us using our contact form.

 

This entry is presented for informational purposes only and is not intended to constitute legal advice.