|Free Lease Advisory|
How many times have tenants wanted a "quick fix" for a landlord form lease that seems to make assignment to anyone except a Fortune 100 company impossible? The following deals with a clause that gives the tenant certain basic rights of assignment. The clause that follows is fairly flexible--it could be used with an office lease, an industrial lease or a retail lease. It can be used a rider to a landlord oriented form lease, or added as an additional provision. It is assumed that this provision is added to a lease with a pro-landlord assignment clause which restricts assignments in a comprehensive way.
Section 49.1 provides that the landlord will not unreasonably withhold its consent to lease transfers that are regulated under other language appearing in the lease, i.e., the assumed pro- landlord assignment clause. Section 49.2 is really where the action is--it gives the tenant the right to transfer the lease in certain circumstances without any requirement to obtain (or even ask for) the landlord's consent for such transfers. Section 49.2 (A) gives the tenant the right to assign to an affiliate. A broadly drafted pro-landlord assignment clause would require the tenant to obtain the landlord's consent for such a transfer. This provision does away with that requirement.
Section 49.2 (B) allows mergers and consolidations so long as the surviving entity has a net worth at least as great as that of the tenant when the lease was originally executed. Presumably, the rationale for this net worth requirement is that the landlord should be no worse off (from a credit strength standpoint) than when it executed the lease with the original tenant. Many landlords would not be happy with that test, and would prefer to have some objective measure of net worth following the merger, often by reference to a specific fixed amount, e.g., a net worth of not less that $10 million immediately following the merger.
Still other landlords may prefer to fix the net worth of the surviving entity by using some multiple of the rentals remaining under the term of the lease. For instance, if the rent for the remaining term equals $500,000, the landlord may require a net worth for the surviving corporation to be, say, $5 million, or ten times the amount of the remaining rental under the lease. Such an approach does not provide any real assurance that the rental with be paid by the surviving entity, rather it merely provides some measure of the landlord's business risk of allowing such transfers to take place without its approval.
Section 49.2 (C) allows the tenant to transfer the lease to the buyer of all of its business operations. Although the clause states the buyer must have a present intention to continue business operations, this requirement really offers no great protection for the landlord since an ongoing business may default on the lease just as easily as one that discontinues business operations. This section also contains the net worth test of "...at least as great as that of the Tenant as of the execution of the lease..." discussed above. Section 49.2 (D) allows the tenant to assign or sublease all or any portion of the premises to a franchisee or licensee of the tenant, a right somewhat more useful to a retail tenant since franchising is far more prevalent with retailers than with office tenants.
Section 49.3 provides that the tenant is free to sell its corporate shares, and that such a sale does not constitute an assignment which requires the landlord's approval under the assignment clause. Many landlords insert percentages for the amount of stock which may be transferred without requiring the tenant to obtain its consent for the transaction. Still others allow corporate stock transfers to occur so long as there is no change of control of the tenant as a result; such landlords want the right to approve stock sales which change control of the tenant or which exceed a certain percentage.
Section 49.4 releases the tenant from responsibility for performance and rentals following the effective date of transfers that are made within the scope of Section 49.2. Most sophisticated landlords will not agree to release the original tenant following a transfer, even if the transferee has substantial credit strength. These landlords refuse to release the tenant on principle, and point out that the lease is being transferred for the benefit of the tenant, and if the landlord's credit position is enhanced as a result, so much the better. Absent an express release provision, the tenant would continue to be liable for performance even though the lease is assigned to a third party.
Article 49. Tenant's Rights of Assignment.
Notwithstanding anything to the contrary contained in the lease, Tenant shall have the following rights with respect to assignment, transfer or sublease (referred to hereinafter as a "Transfer") of the demised premises:
49.1 Landlord agrees that it will not unreasonably withhold its approval to any Transfer of the demised premises or any part thereof, provided such Transfer shall be subject to all of the terms and conditions of the lease.
49.2 Tenant shall have the right to perform any of the following acts without the necessity to request or obtain Landlord's approval therefor:
(A) Transfer the demised premises or any portion thereof to any "affiliate company." An "affiliate company" shall mean, for purposes of this Article 49, any corporation, partnership or other business entity under common control and ownership with the Tenant, or with the parent or any subsidiary of the Tenant.
(B) Merge into or consolidate with any corporation, provided that following such merger or consolidation, the resulting surviving entity shall have a net worth at least as great as that of the original Tenant executing the lease at the commencement hereof.
(C) Transfer the demised premises, or any portion thereof, to any buyer of all or substantially all of the business operations of Tenant, provided that, as of the effective date of such Transfer, (i) such buyer intends to continue the operation of such business as a going concern, and (ii) such buyer has a net worth at least as great as that of Tenant as of the execution hereof.
(D) Transfer the leased premises to any franchisee or licensee of the Tenant, provided however, such transferee shall be subject to all of the terms and conditions of the lease.
49.3 No sale of all or any of the shares of Tenant shall be considered as a transfer or assignment of this lease which shall require the approval of Landlord.
49.4 If Tenant shall make any Transfer pursuant to Section 49.2, Tenant shall be liable and responsible for the full and complete performance of this lease and for all payments arising prior to the effective date of such Transfer, but Tenant shall be relieved of any responsibility for any obligation, payment or performance falling due or arising after the effective date of such Transfer.