Lease Assignments In Retail Business Acquisitions

When a multioutlet retail business goes on the block, the store locations are one of its most valuable assets. Depending on the type of deal, the buyer may need the consent of the landlords to use them. This is not always the easiest thing to get.

• Whether or not the seller can transfer lease rights can depend on the form of the deal:

o If the acquisition is a purchase of assets, the transfer of lease rights is done by assignment. Under most leases, that requires the consent of the landlord (which, depending on the terms of the lease and applicable state law, may or may not be arbitrarily withheld).

o If the acquisition is a sale of stock or a merger, the buyer takes ownership of the acquired company’s assets automatically as a matter of law unless the particular lease defines “assignment” to include a transfer by operation of law.

• Landlords often look for an increase in rent, remodeling or simply a cash payment when a party (usually the seller) seeks consent to assign a lease. The parties can consider one of the following options:



o Requiring the seller to use its best efforts to obtain landlord consents, but cap the amount the seller is required to spend. The cap could be a specific number of dollars or a formula tied to a proposed rent increase or outlay.

o Shifting some of the cost of obtaining landlord consent to the buyer. The parties can provide, for instance, that the buyer will accept rent increases up to a certain amount without any reduction in purchase price. The agreement can also provide for sharing the cost, by reducing the purchase price by some specified percentage of the rent increase or other outlay.

• The buyer needs to know it will have a sufficient number of stores to make the deal worthwhile a critical mass. The buyer may require consents be gotten for:



o A fixed number of the stores in the chain; or

o Specific stores in the chain the buyer sees as crucial.

• If the buyer and seller can’t get landlord consents on all stores, there are two alternatives remove the store from the deal (with an appropriate reduction in purchase price), or require the buyer to take the store anyway (subject to “putback” rights)

o If the parties remove from the deal any store for which consent is not obtained, the parties will need to agree on a value for each store, which should be set out in the purchase agreement.

• If the buyer must take the store without landlord consent, it will want protection against later loss of occupancy. It typically will want putback rights. Various formulas are possible:

o At one end, the buyer might have the right to put the store back only if the lease was actually declared in default and the buyer legally dispossessed;

o At the other end, its right would be triggered simply by getting a letter from the landlord questioning the buyer’s occupancy, or by the landlord’s accepting rent subject to a reservation of rights; or

o A more economically focused standard is whether the buyer has actually been prevented from operating the store by reason of the failure to obtain the landlord’s consent.

• If the putback clause has been triggered and the store is to be returned to the seller, the buyer will want some of the purchase price back. Typically, the parties agree that if a store is put back, the buyer will get the assigned lease value.