Leases: The Takeover Lease
When office building vacancies are high, as now, landlords are likely to use every means within the law to attract tenants from other properties. In one technique, the takeover lease, an existing tenant is induced to sign a lease in another building because of the new landlord's promise to take over the existing lease, i.e., assume liability under the old lease for the balance of the term. The tenant's only concern is that its obligations not be increased because of any actions by the second landlord.
New Landlord's
Obligations
In a takeover situation, the new landlord
should assume all obligations under the
lease, including payment of any escalation
or percentage rent payable in addition to the
base rent. However, the new landlord should
not be liable for any breaches of the lease by
the tenant and should not have the obligation
to restore the premises at the end of the term
(since this would be the duty of the tenant
whether or not the takeover occurred). The
date of the takeover, i.e., the time when the
second landlord's obligations begin, should
be the later of (1) the date when the tenant
vacates the old premises or (2) the inception
of the tenant's liability under the new lease.
Legal Barriers to
Takeover
The first landlord's view of a takeover lease is
that it constitutes a "raid" on his building. He
may sue the second landlord on the grounds
that the action constitutes an improper
interference with a lease relationship.
However, as long as the second landlord
has not misrepresented material facts (e.g.,
with regard to the safety of the building)
or used coercive measures but has acted
only to further his own economic interests,
the lawsuit is not likely to succeed. Another
method available to the first landlord is
to insert an "anti-raid" provision in the
lease that bars the tenant from accepting a
takeover offer. Such a provision might include an acknowledgment by the tenant that
occupation of the premises is important to the
landlord's successful operation of the building
and the tenant's agreement that all future
rent is to accelerate and become immediately
payable if the tenant vacates the premises.
Rights of New
Landlord
The takeover landlord should receive an
up-to-date copy of the existing lease so that
the precise obligations being assumed can be
determined. If the takeover is in the form of
a sublease, the tenant should agree to make
no modification of the prime lease without
the consent of the takeover landlord. The
latter should have a free hand in dealing
with the leasehold, i.e., he should be able to
assign, modify or surrender it or sublet the
premises. (All this assumes the lease permits
are to be done without the consent of the first
landlord.) If the takeover landlord is able to
re-let the premises, he should be entitled to
keep all of the rent, having assumed all of the
obligations under lease.
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.David Tevlin is Managing Director, Corporate Real Estate Services practice, in BDO’s New York office. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.
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