Category Archives: lease negotiation

Why Do You Want A Broad Right To Assign?

Mr. Jones’ company is bound by an agreement that is vital to the operation of his business.  It could be a space or equipment lease, or some sort of financing, supplier or service agreement.  The agreement says that its transfer or assignment is prohibited or permitted only with the other party’s approval.  Consider these situations: (i) his business is doing very well and he wants to sell it or its assets while they are most valuable, (ii) his business is doing poorly and he wants to get out by selling it or its assets, (iii) for accounting, management or other purposes he wants to transfer the agreement to another company he owns, a subsidiary or parent company, or to merge his company with another, or (iv) he wants to bring in a few other investors or take his company public. 

 

In all these cases Mr. Jones’ ability to transfer the agreement can be a critical factor in whether he succeeds.  A buyer might not be interested in the company or its assets if it cannot take advantage of the agreement.  The other transfers might not be possible if the agreement labels them as prohibited assignments or as ones requiring the consent of the other party, either of which occurs frequently in agreements proposed by the other party.  Unless these issues are properly dealt with during negotiation of the agreement Mr. Jones could have a big problem.  What could he have done? 

 

One solution would have been to define some of some of the activities as not included in the definition of “assignment.”  This can sometimes be achieved for transfers to a parent or subsidiary of Mr. Jones’ company, transfers that do not result in a change in the control of his company, or for transfers to or a merger with a company owned or controlled by Mr. Jones.

 

Another solution would have been to set criteria which if met by the intended transferee would permit the transfer without first having to obtain the other party’s consent.  An example would be where the transferee has a specified net worth or at least a net worth greater than Mr. Jones company’s at the time of the transfer, and also has a specified number years of experience in Mr. Jones’ company’s business.  Satisfying these criteria could provide comfort to the party on the other side of the agreement that it will be doing business with a responsible and qualified replacement for Mr. Jones.

 

Even if the desired transfer is allowed Mr. Jones could still be concerned about whether his company will remain liable for his replacement’s compliance with the agreement.  That will be the subject of one of my future Legal Briefs.

 

With over 35 years experience Stu Heller helps his clients understand and improve their business and real estate transactions.  His website is at http://www.theleasinglawyer.com. He can be reached at 206-623-0579 and hellerlaw@aol.com. Contact him for a free initial consultation. Be sure to consult your lawyer before applying any of the above to a particular situation.  

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“SUBORDINATION” AND “NONDISTURBANCE”

When the landlord insists that you agree to allow its lender to subordinate your lease to the lender’s lien, that is, to make the lender’s rights superior to yours, insist on a Anondisturbance” provision requiring the landlord to provide you with an agreement from its lender that if the lender takes over the property it and any of its successors will continue to respect your lease rights so long as you satisfy your lease obligations.

IMPROVE THE “ESTOPPEL” CERTIFICATE PROVISION

You may be required to provide an “estoppel” certificate or letter at the demand of the landlord.  In it you must state whether certain things about your leasehold relationship are true, such as whether the landlord is in default, the rent has been paid more than one month in advance, and whether and if so how the lease has been amended since it was originally signed.  It is intended to be relied on by a third party such as a bank or purchaser.  Have a qualified attorney review it because the third party can come after you later if your statements are untrue.  Specify that your statements are made only “to the best of your current knowledge and belief.”  You might try to get the landlord to promise to provide you with a similar statement or certificate which you can give to your lender when you are trying to refinance your furniture, fixtures, equipment or tenant improvement loan.

KEEP THE LANDLORD FROM BEING ARBITRARY

Propose that whenever you are required to get the landlord’s approval or consent, it will not be unreasonably delayed or withheld.  If you cannot get such a blanket provision, try to insert the requirement at each point in the lease where you want to avoid arbitrariness on the part of the landlord.

PROTECT YOUR VISIBILITY, ACCESS AND PARKING

Try to include a provision preventing the landlord from making changes that would materially interfere with the visibility of your premises or signage from nearby roadways, or with your customers’ convenient access and parking.

AVOID RELOCATION PROVISIONS

Try to avoid a provision which would allow the landlord to relocate you to another space if it wishes.  If it is unavoidable, ask for the right to comparable space with comparable access and visibility, the right to prevent the relocation if you reasonably believe the space is not comparable, and a promise that the landlord will pay every cost associated with the relocation including remodeling, moving, and publicizing the new location, and another promise that the relocation will occur during your slow season.

USE A TITLE REPORT TO YOUR ADVANTAGE

As part of your due diligence before entering into the lease it is often advisable to obtain a current title report or preliminary title insurance commitment on the premises and the building in which it is located.  Try to get the landlord to supply the report, but if that is not possible or the landlord’s most recent report is a bit stale then get your own.  Ask a local title insurance company for a “preliminary leasehold title insurance commitment.”  Most title companies are happy to provide the report, though if you do not plan to purchase the insurance ask about the cancellation fee.  It is usually small.  Besides assuring yourself that the landlord actually owns the property, you may discover an encumbrance which is inconsistent with your business.  For example, I once found a recorded restriction on outdoor retail sales when my client wanted to offer outside dining.  Even the landlord was surprised.  We made removal of the restriction a condition of the lease.