M&A Monday: Beware of the Landlord

In an M&A transaction, the seller almost always has a lease in place (with varying importance). If not handled properly, this lease can delay or destroy a deal. Below are the considerations and guidance.

I am representing a buyer on the acquisition of a chain of large restaurants. Each landlord is making our life miserable and delaying our closing.
In an asset acquisition, the current lease must be assigned from seller to buyer with consent of landlord.

In an equity acquisition, there is no assignment, but landlord almost always has to consent (check the lease agreement). Not getting landlord consent is often a default under the lease.

Problematically, the landlord is often not motivated to move quickly. The opposite. The landlord is wary of a new tenant. Landlord essentially has a veto or blocking rights over the acquisition by withholding consent and they know it.

Landlord will have requirements and often request information and concessions, such as: 1. Detailed buyer information (e.g., tax returns, personal financial statements, entity documents) 2. A reset to market rent with no tenant improvements offered (if below market rent) 3. Extension of the lease period 4. Personal guarantee from the buyers 5. Even, asking to meet the new buyer in person

Landlord may also request seller remain liable (guarantee) for the new tenant’s obligations for a period of time after closing. Timing considerations. Because the landlord discussions usually take a long time, it is important to start these discussions early. However, sellers often do not want to alert the landlord until the deal is closer to final or at least a purchase agreement is signed. This often creates a delay in closing. Try to start this process early and confidentially.

It is important to include the landlord’s approval as a closing condition in the purchase agreement. If not, you run the risk of signing the purchase agreement, not receiving the landlord’s consent and having no way out of the purchase agreement.
Two notes on SBA 7(a). If a buyer is using an SBA loan, the SBA requires a lease that lasts up to ten years after closing. This can be made up of regular lease term or renewal options. This is a requirement regardless of the importance of the property. Second, the SBA lender requires a landlord waiver and the SBA lender rarely has any interest in negotiating the landlord waiver.

Procedural tips. Have your lawyer review the lease as part of legal due diligence. Determine whether consent or assignment is required; on rare occasions, nothing is required. Have the seller approach the landlord. Usually seller has a better relationship. Make sure to frame the new buyer as much more credit worthy.

Get ready to jump through all of the landlord’s hoops and look out for this issue early.