Every tenant needs the ability to transfer its lease with respect to a “corporate transaction” (such as a merger, consolidation or transfer of assets or equity interests) without the need to obtain its landlord’s consent. Often, the language of lease assignment and subletting provisions is ambiguous in this regard and this can lead to problems down the road.
In today’s issue, we provide seven suggestions when drafting a lease assignment provision to provide easy assignability for such a corporate transaction.
Alan KatzMintz & Gold LLP
Bagelgate and Lease AssignmentsIn case you have not noticed, we are entering political silly season.
Because we New Yawkers think we are first at everything, Mayor Bill de Blasio got things started on National Bagel Day by tweeting that his favorite bagel comes from the Bagel Hole Bakery in Brooklyn and is whole wheat with extra cream cheese. Toasted.
Wait, what? Toasted??!!
Since no self-respecting New Yorker would ever toast a fresh bagel this led to a twitter platter of outrage.
It was as if Hizonner had proposed entering into a commercial lease without the vaunted legal baking of Mintz & Gold.
His bagel preference was schmeared all over the internet and it did not help that the Mayor, who grew up outside Boston, was once caught in “Pizzagate” and vilified for eating a pizza slice with (get this) a knife and a fork!
A local state senator smoked the Mayor and posted a poll regarding whether toasting bagels is a crime and offering two choices, “Yes, toasting a bagel is a crime” and “No, I like ruining bagels.”
Mr. de Blasio does not have a lox on culinary kerfuffles (see poor President Obama, a man so fastidious that his evening snack was said to be seven almonds (not six, not eight), who regularly ran into trouble for not happily partaking in the more nasty campaign trail fare).
You do not have to be a brain sturgeon (or a know everything bagel) to know that if you want to appear genuine and sincere do not tweet about how much you fit in when you clearly do not. It turns out the Bagel Hole Bakery does not toast its bagels; they do not even have a toaster!
To the Mayor’s credit, after deleting the toasting abomination from his twitter post he said, “What can I say, I must have a hole in my memory.”
The commercial lease version of toasting your bagel is a tenant entering into a “corporate transaction” (such as a merger, consolidation, sale of assets or transfer of equity interests) and being limited in its ability to transfer its lease(s) without landlord consent.
Almost all leases restrict the rights of tenants to assign and sublease, including restrictions on transfers of the tenant’s assets and equity interests which can be deemed assignments to prevent tenants sidestepping the legitimate assignment and subletting restrictions.
We have discussed in past newsletters how to draft leases to allow tenants to assign (or be deemed to assign) in the event of a bona fide corporate transaction, how to review a portfolio of leases to make sure that this has been done properly, and how to focus on multi-tiered tenants to be sure that each tier of the tenant entity has the necessary flexibility.
Not addressing this issue properly can result in ambiguity as to whether or not the landlord’s consent is required, and no tenant wants to be in the position where it needs to ask its landlord for approval and risk the landlord asking for something in return.
We have represented many corporate tenants in such transactions and recently had the opportunity to do so again as a client sold one of its divisions.
Luckily, we had represented the client during the negotiation of many of these leases and the exceptions to the restrictions on assignment in most of the leases were broad enough to cover all possibilities.
Yes, that sound you are hearing is us patting ourselves on the back but seeing how valuable a properly crafted lease assignment provision can be made us decide to revisit this topic again.
Make sure your lease assignment provision is not toast by following these seven suggestions:
- Assignment 101. You must be entitled, without your landlord’s consent, to transfer to a financially sound entity created by merger, reorganization, recapitalization or any other bona fide change in control of such entity (“directly or indirectly”, i.e. at any level of your entity), or a financially sound purchaser of all or substantially all of your assets or stock, provided the successor entity assumes your obligations under the lease and the transfer is for a valid business purpose (i.e., not principally to transfer the lease).
- Consider multi-tiered tenants. Multi-tiered tenants present a particular problem since under some leases changes in control in upper tier (parent) entities are prohibited and 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. Often such permission is given to the actual tenant under the lease but not to the upper tier entity. In other words, the exclusion from the requirement of obtaining the landlord’s consent does not match up with the prohibition which requires such consent in the first place. Make sure your proposed solution addresses the problem at the proper tier.
- You can avoid this problem by (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.
- If a restriction is too broad, we often take the position at the time of the assignment that the exception should be interpreted as intended to be equally broad, even if the language is not very clear. Of course, it is better to be clear.
- Address public markets. Your lease should permit corporate transactions in public markets,public markets, i.e., transfers of shares (by persons other than those deemed “insiders” under SEC rules) if such sale is effected through the “over-the-counter market” or any recognized stock exchange (e.g., a public offering).
- Partnership flexibility. If you are a partnership (e.g., law firm, accounting firm) be sure to permit the admission, withdrawal, removal, incompetency, death and retirement of partners without landlord’s consent, since without a specific provision these transactions are often defined as “assignments” under typical lease clauses.
- Financial Strength. Determine the surviving entity’s financial strength with an objective test. Many leases provide that the net worth of the surviving entity must be the greater of the tenant’s net worth immediately prior to such transaction or its net worth on the date of the lease. Your net worth immediately prior to the transaction is the most relevant value, although if your entity has a net worth well in excess of what is needed to pay the rent, you may prefer to use a fixed dollar amount or some multiple of the rent that makes your landlord comfortable but keeps your flexibility. Net worth may also not be the appropriate standard and other valuation methods include EBITDA or your corporate rating.
- Focus on notices. Many corporate transactions are subject to securities or confidentiality restrictions. Make sure that if your transaction is subject to these restrictions that the notice to Landlord can be given after the transaction is completed.
- Cover ancillary provisions. In addition to not requiring landlord’s consent, make sure that other inapplicable assignment/sublet provisions do not apply (e.g., your landlord should have no right to recapture and net “profits” should not be split).
Astoundingly, the bagel toast or not toast debate can be found all over the internet. The consensus seems to be to not toast a fresh bagel, but toasting is acceptable when the bagel is not fresh or is mass produced. Now, if you scoop out the dough based on some keto inspired gluten free diet nonsense then you are hopelessly soulless and neither freshness nor toasting can save you. But follow the seven suggestions above and at least your lease assignment provision will not be chopped liver.