Inheriting Leases Upon Purchase of an Asset – Rip Van Winkle’s Revenge!

Rip Van 2

So you’ve just closed on the purchase of that wonderful business park that you and your investors have looked at, examined and fully determined will be the best investment that the group has purchased in years.  And to boot, the seller caved on the price when he realized he needed the cash from the proceeds to cover an old debt that was being called during the negotiaitions. You have reviewed rent rolls, survey, zoning status (which looks great for expansion and modification of the park for additional development) and the usual quick review of enviromental reports, etc.  In fact, the adjacent landowner is also interested in selling his cleared 5 acres to you soon since it needs to be sold to settle his parents’ estate. He is anxious to settle on a price that is 30% below market.

You had your attorney review the closing statement and the summary of leases of the tenants in the park as well as the recorded documents.  You close on the transaction, take a lap around the track and send a notice to local business papers about the transaction.

You are in the clear, right?

Right?

NOT.

One of the most overlooked aspects of this type of purchase is a thorough lease review and evaluation.   Because here is what may happen….

Jones & Company LLC has been a gracious 20 year tenant who pays rent on time and in full. Mr. Jones and his staff are model tenants who run their business and never cause trouble. He has approximately 60% of the leaseable area in the park.  Four months after closing, Jones exercises his right to assign his lease after a life of making nuts and bolts for vehicles of all types.

When you get notice of his actions, you look at his lease and see he had the right to assign it to anyone who “operates a business that does not violate exisiting law.”  Worse – there is no requirement of Landlord consent – a term he negotiated with the predecessor’s predecssor in fee interest. However, his lease was ratified by your seller years before the sale of the property.

…. And the assignee has a right to operate for the remainder of the term and has additional rights to extend the lease for three – 5 year terms without landlord approval as long as they are not in default. They also neglected to sign or otherwise agree to abide by any SNDA – including your own lender’s requirements.  They have explored the use of the space as a music venue which was previously allowed by state law and local ordinance, but now prohibited. They are also exploring the use of the space as a musical instrument distributor.  MIC&CO, LLC has also recently contacted you to remind you they have the exclusive on musical instrument sales in the park.  To top things off, today you have received notice from your lender that the assignment of leases without approval violates your loan agreement.

 

Uh-oh….

 

TIPS TO AVOID THIS PROBLEM:

1.  Make sure that you or your attorney reviews all leases, amendments and related documents to determine the length, breadth and width of the lease terms, allowable uses, options to extend the lease, options to purchase and other terms which will directly affect you if you take a direct assignment of leases;

2.  Never close unless all tenants provide you with estoppels showing no known defaults;

3.  Insure that all exisitng tenants and leases are acceptable and have been approved by your lender;

4.  Examine the extent of all tenants’ rights to sublet and assign their premises and what consent by landlord is required;

5.  Also make sure that the use clauses in each lease do not allow for operations that are not in congruence with other uses in the park, violate laws or ordinances, or are detrimental to the beneficial use of the park for operational, legal and business oppotunity of the landlord; and

6. Determine if the use language would violate any exisiting exclusives held by other tenants in the park.

 

You are the master of  your domain. Be careful and you will be better prepared to own, manage and sell your new asset!

 

 

 

 

 

 

 

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