Practical Tips for Commercial Lease AssignmentsMarch 4, 2013
When representing a Landlord or a Tenant in a lease assignment transaction, as part of a sale of a business or otherwise, there are many issues to identify and address. First and foremost, a thorough review of lease documents should be performed to identify all consents that are required and any lease modifications that may be necessary as a part of the transaction. Identifying approvals and modifications needed early in the transaction will save time and trouble after the fact. The following practical tips may help in addressing these matters.
LANDLORD CONSENT. What are the lease provisions regarding assignment? Is the transaction permitted without Landlord consent, does it require Landlord consent with a reasonableness requirement, or is the Landlord permitted to withhold its consent in its sole discretion? What financial and business experience documentation or details on the business terms of the transaction does the Landlord have the right to request? Does the Lease provide for the existing Tenant to be released from liability or does that Tenant remain liable?
ASSUMPTION AGREEMENT. A Landlord will want the replacement Tenant to sign an assumption agreement that assumes all of the prior Tenant’s obligations under the Lease, and will want to review financial and other documentation to determine that the assignee has equal or greater financial capability and business experience. If the Lease has a guaranty, the Landlord will want a replacement guarantor, additional security deposit, or other comfort that it is getting a solid and credit-worthy replacement Tenant. Even when the current Tenant is not released from liability, the sale of a business or other transaction might not enable the prior Tenant to have sufficient assets readily available to satisfy lease obligations.
ESTOPPEL CERTIFICATE. A new Tenant will want an estoppel certificate from the Landlord confirming that the existing Tenant is current on its rent payments and in compliance with other Lease obligations, so that the new Tenant does not inherit defaults. If the Lease provides for payment of taxes, operating expenses, or other charges, provision should be made for those to be prorated.
LENDER CONSENT. Lender consent may be required from the Landlord’s lender to a lease assignment, and the new Tenant will want non-disturbance protection from the lender to protect it from Landlord default. The new Tenant may also need a Landlord Waiver or other agreement signed in order to satisfy its lender, which is likely not to be specifically addressed in the Lease and may therefore need to be negotiated. If the Lease provides for a Landlord lien on the new Tenant’s personal property, a release or subordination may be required.
CONSENT FOR IMPROVEMENTS. Most leases will require Landlord consent and submission of plans and specifications for any substantial alterations. Therefore, to be sure that the property can be altered for the buyer or new Tenant’s business needs, any necessary consents to alterations should be obtained as part of the approval of the assignment. Depending on lease language, consents may also be required to preserve signage rights and substitute signage.
ADDITIONAL TERM. The remaining term of the Lease may not be long enough to satisfy the Tenant’s or its lender’s requirements. Such a case may require negotiation of additional term, rental rates, or other terms of any lease extension or additional options to renew.
PERMITTED USE AND OTHER TERMS. Take a careful look at the use clause to make sure that it permits any change in use contemplated by the proposed Tenant. Obtain any necessary consents for a broader use. Look for any other terms that are specific to the former Tenant and may need to be modified.
These are only a few of the issues that need to be reviewed in analyzing what is needed from either a Landlord’s or Tenant’s point of view in connection with a Lease assignment. Any review should be specific to the transaction at hand. Careful attention to these issues will avoid problems after a closing!