What Happens to Your Lease If Your Company Is Acquired?

A lease is a contract with a specific tenant entity. When the landlord approved your company, it evaluated your business, your financial condition and sometimes your investors. Landlords want assurance that the party responsible for the rent does not become a different, weaker party without their review.

The ordinary assignment clause handles the obvious case, in which the tenant transfers the lease to another company. But ownership of a company can change completely while the tenant entity stays the same. If all of your stock is sold, the name on the lease does not change, and in the absence of specific lease language no assignment may have occurred.

Landlord forms close that gap with a change-of-control provision. It states that certain changes in the ownership or control of the tenant are treated as an assignment, which brings the consent requirement, and everything attached to it, into play.

The wording varies, and the variations matter. Typical triggers include:

• A transfer of a controlling share of the tenant's stock, membership interests or voting power, in one transaction or a series of them.
• A merger, consolidation or reorganization involving the tenant.
• A sale of all or substantially all of the tenant's assets.
• A change in who has the power to direct the tenant's management.
• Sometimes, a change in control of the tenant's parent company, not only the tenant itself.

Many forms exempt companies whose shares trade on a public exchange, since those shares change hands daily. A private, venture-backed company gets no such automatic exemption.

Read the definition for how it treats cumulative transfers. A clause that counts every issuance or transfer of equity toward a control threshold can be triggered by successive funding rounds, with no acquisition involved. Founders are often surprised to learn that a financing could technically require landlord consent.

Whether a particular deal structure amounts to an assignment under your lease is a legal question that depends on the lease language and the governing state law. Have your attorney answer it for your lease specifically.

If your transaction counts as an assignment and you have no carve-out, the full transfer article of the lease applies to your company's sale.

• Consent. You must ask the landlord to approve, under whatever standard the lease sets. Even a reasonableness standard takes time, and deal schedules are tight.
• Recapture. If the lease lets the landlord take back the space in response to a transfer request, an acquisition could give it the right to terminate your lease.
• Profit sharing and fees. Clauses written for subleases can be read to reach consideration paid in a company sale, and the landlord may charge review fees.
• Leverage. A landlord that knows a closing depends on its signature can ask for something in return: a larger deposit, a guaranty from the buyer, a rent adjustment or a lease extension.
• Default. Closing without a required consent can be a default under the lease, which is a problem the buyer inherits and will price.
• Confidentiality. Asking for consent means telling the landlord about a transaction before it is public.

None of this means landlords routinely block acquisitions. Most are practical. The point is that the outcome should not depend on the landlord's goodwill at the moment your leverage is lowest.

The standard solution is a clause listing transfers that do not require landlord consent and are not subject to recapture or profit sharing. It is negotiated when the lease is signed, and landlords generally accept the concept for a creditworthy tenant. The negotiation is over scope and conditions.

Transfers a growth company should try to cover:

• An assignment or sublease to an affiliate, meaning an entity that controls, is controlled by or is under common control with the tenant.
• A transfer to the surviving entity in a merger or consolidation.
• A transfer to a buyer of all or substantially all of the tenant's assets or business.
• A sale or transfer of the tenant's stock or other equity, including a sale of the whole company.
• Equity financings, including the issuance of shares to venture investors, expressly stated not to be a transfer.
• A public offering and subsequent trading of shares.

Conditions landlords commonly attach:

• Notice. Tenants should ask that notice be allowed shortly after closing when confidentiality or securities rules prevent advance disclosure.
• A financial test for the successor. This is the most heavily negotiated point. A test measured against the tenant's net worth on the day the lease was signed can be hard for a venture-backed company to pass years later. Tenants prefer a test requiring only that the successor be able to perform the lease obligations, or one measured immediately before the transaction.
• Assumption of the lease in writing by the successor.
• No change in the permitted use.
• A requirement that the transaction have a genuine business purpose and not be a device to avoid the assignment clause.
• No existing default at the time of the transfer.

During due diligence, the buyer's lawyers read every lease. Knowing their list lets you fix problems in advance.

• ✓Does the transaction, as structured, require landlord consent under each lease?
• ✓Does a transfer request give the landlord a recapture or termination right?
• ✓Is the tenant in default, or has it received any default notices?
• ✓Will the landlord provide an estoppel certificate confirming the lease is in effect and listing any claimed defaults?
• ✓Do renewal, expansion and termination options survive the transaction, or are they personal to the original tenant?
• ✓What security deposit, letter of credit or guaranty supports the lease, and does the transaction affect it?
• ✓Has any founder or parent entity guaranteed the lease, and will that guaranty be released or replaced?
• ✓What restoration obligations and remaining rent liability come with the space?
• ✓Are there subleases, and were they properly consented to?
• ✓Do the signed documents match what the company believes its deal to be, including all amendments?

A lease that needs consent is not a deal breaker, but it becomes a closing condition, and closing conditions create delay and risk. A lease with a clear permitted transfer clause is one less item on the list.

1. If you are negotiating a lease, put the permitted transfer concept in the letter of intent, including the exclusion for equity financings.
2. If you already have a lease, ask your attorney to read the assignment article and tell you which transactions would require consent.
3. Look for an opening to amend. A renewal, expansion or other lease amendment is a natural time to add or improve the clause.
4. Keep a complete lease file: the lease, every amendment, consents, commencement date letters and notices.
5. Check whether your options are personal to the original tenant, and ask that they extend to permitted successors.
6. If a transaction is approaching, review the leases early so any consent can be requested on your schedule.

Tenant Advisory Group raises permitted transfer language at the proposal stage for technology clients, because it is far easier to obtain while landlords are competing for the tenancy than after the lease is signed. We work alongside your attorney, who should draft and approve the final wording.