Most leases allow tenants to transfer their lease without landlord consent in the event of a bona fide corporate transaction (e.g., a merger or sale). But the language of many lease assignment and subletting provisions can be ambiguous in this regard, causing a headache for those involved in such transactions.
In today’s issue, we provide five suggestions when reviewing a lease portfolio to determine assignability.
Amazon and Lease Assignability
As you have no doubt heard, there is a little sweepstakes going on to see which lucky city gets to host Amazon’s second headquarters.
Twenty excited and panting finalists (can cities pant?) have made the cut.
The winner has been told it might receive 50,000 jobs and billions in investment (although it might be impolite to mention the billions spent on incentives and lost tax revenues).
There is an itsy-bitsy touch of arrogance in this whole approach, especially since many think Amazon already knows where it wants to end up and is using the bidding process for free research for its other offices and warehouses.
I say this not out of envy, but rather out of respect.
That is why I would like to announce that Mintz & Gold is accepting bids for its second headquarters from all interested cities.
Hold on, stop pushing, get in line.
Not that we need a second headquarters, but 238 cities bid for Amazon and we expect that M&G will dwarf that number; after all, we will provide an economic bonanza for the blessed winner, not to mention a certain celebrity cache unmatched in legal circles.
We will not be cheap and are expecting to be wooed with an avalanche of incentives.
Hey, we’re lawyers – we’re supposed to be piggish!
In addition to boatloads of cash, maybe someone to carry my briefcase (those leases can get awfully heavy!). Chocolate would be nice.
Companies such as Amazon get to call their own real estate shots, but every commercial tenant needs complete flexibility when it comes to undertaking legitimate business transactions (e.g., mergers or sales) without being tripped up by their various lease assignment and subleasing provisions.
Almost all leases restrict the rights of tenants to assign and sublease, including restrictions on transfers of the tenant’s equity interests which can be deemed assignments to prevent tenants sidestepping the restrictions.
At the same time, most leases provide an exception which allows tenants to assign (or be deemed to assign) in the event of a bona fide corporate transaction.
Yet, sometimes this basic need is not clearly met by the lease language.
As we have indicated in past newsletters, this can be particularly true with multi-tiered tenants, where under some leases changes in control in upper tier entities are prohibited (to avoid tenant transfers designed to circumvent the lease restrictions), but the right of such upper tier entity to transfer the stock or assets of the tenant entity as part of a legitimate upper tier corporate transaction is not clearly permitted, even when the parties’ intent at the time the lease was negotiated was to address this concern and such permission is given to the actual tenant under the lease.
The result can be ambiguity as to whether or not the landlord’s consent is required, and the last thing a tenant wants to do is to have to ask its landlord for approval because of such ambiguity. In that situation, many landlords will get in touch with their inner Amazon and ask for something in return.
In the past, we have provided suggestions in drafting a lease so that the restrictions requiring landlord consent are as narrow as possible and the exclusions from the need for landlord’s consent are as broad as possible.
Still good advice, but when undergoing a corporate transaction, either as transferor or transferee, you are often stuck interpreting leases that you did not draft and which may not be clearly constructed.
In such instances, we often find that the best response is to go all Bezos and be as assertive as reasonably possible in interpreting the lease document and approaching the landlord.
Our thinking has even evolved with respect to multi-tiered assignments with ambiguous lease language; if the restriction is broad, then the exception should be interpreted as intended to be equally broad, even if the language is not very clear.
Alexa, provide five suggestions when reviewing a portfolio of commercial leases for the appropriate flexibility as part of a corporate transaction:
- Remember leasing 101. You must carefully review each lease and first look for the standard provision allowing, without the landlord’s consent, transfers to an affiliated entity, a financially sound entity created by merger, reorganization, recapitalization or any other change in control of such entity, or a financially sound purchaser of all or substantially all of the assets or stock.
- Confirm whether exclusions are as broad as restrictions.Be mindful reading the exclusions, particularly with multi-tiered tenants, since as stated above sometimes a change in control of a tenant’s parent entity is a prohibited “transfer”, and the exclusion from the requirement for landlord’s consent provides for an assignment to a successor entity of the tenant. But since the change in control occurs at an upper tier level, the actual tenant entity does not change and there will be no assignment. In other words, the exclusion does not match up with the prohibition which requires such consent in the first place.
- Look for savings clauses. Leases may avoid the problem stated above in a number of ways, such as (a) specifically defining changes in control of upper tier entities as “assignments” of the lower tier/tenant entity, (b) covering in the exclusion all transfers, “directly or indirectly”, i.e., at any level of the entity or (c) creating a broad category of transactions encompassing all transactions for a legitimate business purpose, however accomplished, which results in a change in control.
- Consider bullying through. The real estate director of one of our longstanding clients takes the position that even if the technical legal and “abundance of caution” answer may be that consent would be preferred, the practical answer is often that it is better to move forward as if no consent is required (i.e., notify the landlord (if required under the lease) as a transfer not requiring consent). The thinking with this approach is that if the tenant continues to occupy the premises with substantially the same staff and to pay its rent, the landlord should not have a say and likely will not object.
It would not be unreasonable to be more cautious with a particularly important space, such as a headquarters lease, but in a transaction with multiple premises it makes sense to limit the instances where consent is requested.
- Confirm remedies. Some leases allow for expedited arbitration (and sometimes allow the prevailing party to have its legal expenses paid by the other party) in disputes with respect to the assignment and subletting provisions. If this is the case, it may provide you as tenant with a little more leverage.
- Limit reliance. Your landlord’s lender/purchaser (and other specified parties associated with the transaction) should be entitled to rely upon your statements in the estoppel certificate, but not other third parties.
- Attach a form. To avoid later disputes, include a form of mutually acceptable estoppel certificate as an exhibit to your lease. This may not cover all future circumstances over the term since you may have different landlords (with different lenders/purchasers), but it is a good start.
- Limit to knowledge. Qualify your statements as to your knowledge as appropriate. For example, you can only state that your landlord is not in default under the lease to your knowledge since you cannot know what you do not know (my, that sounds deep) and the turnaround time on the estoppel is unlikely to allow for much due diligence.
- Give yourself time. Most leases provide for a very short turnaround time (e.g. 5 to 10 days) and failure to timely respond can lead to a default under your lease. You should push for 10 to 15 business days to avoid a frantic rush. Our practice is to review the lease, mark up the estoppel and return within the allotted time an executed version with a blackline showing our changes. We anticipate subsequent negotiations, but we have at least met the lease time requirements and the pressure is off you.
Groucho Marx once said: “I wouldn’t want to belong to a club that would have me as a member”. Not all that different from the Amazon approach (at least for all but one city). Groucho also said about reading a lease assignment and subletting clause: “A child of five could understand this. Send someone to fetch a child of five.” Follow the suggestions above and you can review your commercial lease portfolio’s assignment and subletting clauses and may not even need help from a child of five.