Leases: The Takeover Gambit
When a new office building is completed, the landlord often is under pressure to fill the space as quickly as possible in order to meet a pre-leasing requirement of the take-out lender, to pay operating expenses or for other reasons. One way to obtain a tenant is to assume an existing lease in another building in exchange for the tenant’s agreement to move to the new building. However, the current landlord, anticipating the possibility of such a takeover attempt, may have included in the lease an anti-raid provision that accelerates all future rent in the event a takeover occurs. Alternatively, the current landlord may threaten a lawsuit for unfair interference with a contractual relationship. Dealing with these issues is discussed below.
Takeover Lease
On its face, a takeover lease transaction is fairly straightforward. In
exchange for the tenant's willingness to sign a lease in the new building,
the new landlord agrees to assume all obligations under the existing lease.
The new landlord
takes the risk that he will be unable to sublease the existing space (either
because this requires the landlord's consent or a subtenant cannot be
found). The new landlord must be satisfied that the terms of the new lease
justify the expense he may incur until the old lease expires. If the tenant
enters into a takeover agreement, the following issues should be covered:
-
Commencement of landlord's obligations. When does the new landlord's obligation to pay rent under the existing lease begin? This often is when the tenant commences rent payments under the new lease.
-
Tenant's past due obligations. The new landlord usually will not be responsible for any of the tenant's unpaid obligations under the existing lease.
-
Treatment of sublease profits. In the event the new landlord subleases the existing space, the parties must decide if any portion of the rent will be given to the tenant. The new landlord may be willing to share any potential profit in exchange for a limitation on his total liability under the existing lease.
-
Obligation to restore premises. If the old premises must be restored to its original condition at the end of the lease term and the new landlord makes no further alterations, the tenant should be liable for the restoration cost. If the new landlord alters the premises in order to re-rent it, the parties may agree to share the cost.
Anti-Raid Provision
A tenant wishing to enter into a take-over lease may be thwarted by an
anti-raid clause in the existing lease. Such a clause permits the landlord
to treat the vacating of the leased premises as a material breach, causing
all future rent to
become immediately due and payable or have other penalty provisions. Unless
the remaining lease term is very short, this could prove too great a burden
for the new landlord to assume. A lease may contain such a provision when
the continued presence of the tenant is important to the landlord; for
example, if the tenant is a prestigious national company or if the
building's tenants are engaged in a specific type of business. An anti-raid
clause may be included in shopping center leases when the particular tenant
mix is important for the center's success. Even in the absence of these
considerations, a landlord will not wish to see a number of vacancies in the
building even though rent continues
to be paid.
Lawsuit Against Raiding
Landlord
In the absence of an anti-raid clause, a landlord may consider a lawsuit
against the raiding landlord for inducing a breach of lease. In many states,
a person can be liable in damages because of wrongful interference with
another person's contract or business relationship. However, a landlord who
loses tenants due to raiding by another landlord
usually cannot recover damages for inducing a breach of lease because every
building owner is entitled to act in his best interest. Liability exists
only if the building owner acts fraudulently or maliciously; for example,
when he
induces a tenant to move by making a false claim that the existing premises
are located in a building that is
in dangerous condition or that is slated for imminent condemnation or
demolition.
Real Estate Focus is provided by Somerset’s Real Estate Team for our clients and other interested persons upon request. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. For additional information on the issues discussed, please contact Michael Fritton, CPA. Whether you are a building owner, building manager, real estate developer, real estate professional or an investor, we hope to provide you with timely information so you may be proactive in making your business decisions.
This article was written by and published herein with the permission from professionals of BDO Seidman, LLP. Dan DiTieri is a senior manager in the Real Estate Practice Group in BDO Seidman’s New York office. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
.jpg)