In a previous post we began exploring lease considerations that landlords and parties to asset purchase and sale transactions should be aware of in the M&A context, including that many commercial leases will require landlords’ prior written consent to an assignment and that the original tenant/assignor typically will not be released from its covenant absent landlords’ agreement (notwithstanding any assignment). We went on to discuss some strategies to mitigate this issue from a seller/assignor perspective, such as requiring releases and/or a replacement covenant from the purchaser/assignee as a condition precedent to closing.

From a purchaser/assignee perspective, in addition to wanting to include express provisions in an asset purchase agreement requiring landlords’ consent to lease assignments, other important closing deliverables/conditions include obtaining landlord estoppels, requiring that notices of key leases be registered on title to the subject properties and non-disturbance agreements being obtained from landlords’ secured creditors.

Estoppel certificates

An Estoppel Certificate is a certificate executed by a landlord confirming key lease details, such as the dates and parties to the lease agreement itself, any amendments, a description of the leased premises, the term of the lease, any renewal/extension rights, the current minimum and additional rent payable, and that the lease is in good standing (or if it is not, details of any arrears or outstanding obligations). An Estoppel Certificate provides a snapshot of the lease status that a purchaser/assignee can rely on as of the date it is executed and, subject to the items included/referenced, it can identify issues that a purchaser/assignee would want addressed prior to closing (such as rent arrears, outstanding payments and/or repair requirements for which tenant is responsible). A landlord is not obligated to deliver an Estoppel Certificate to a tenant or prospective assignee and the lease itself may or may not include language governing such, the timing for delivery and the matters to be covered.

Notice of lease

A Notice of Lease is a notice that can be registered on title to a property setting out the details and existence of a lease relating to that property. The registration serves as notice to third parties that the property is encumbered by such lease and provides security of tenure to the tenant and priority of its leasehold interest vis-a-vis any subsequent registrations on title to the property. Among other things, it can provide protection as against a third party purchaser of the property for value who otherwise would not have had notice of the lease (and arguably could claim that it is not bound by it) and mortgagees of the property from time to time, who would not be bound by the lease in a mortgage enforcement scenario if the lease is registered on title subsequent/subordinate to the applicable mortgage. A lease may include language governing or prohibiting registration of a Notice of Lease.

Non-disturbance agreements

Non-Disturbance Agreements are agreements entered into between tenants and their landlords’ mortgagees, whereby the parties agree that the mortgagee will not disturb the tenant’s use and enjoyment of the leased premises provided that the tenant agrees to attorn and pay rent to the mortgagee in an enforcement scenario. Non-Disturbance Agreements are particularly important if a Notice of Lease has not been registered against title or if a Notice of Lease has been registered against title, but subsequent/subordinate to the registration of a mortgage. Where a mortgage has been registered in advance of, and thus ranks in priority to, a lease on title, a purchaser/assignee will want to ensure that a Non-Disturbance Agreement has been duly executed and delivered, failing which the lease is at risk to a mortgagee who enforces its security (i.e., if it sells the property to a buyer that wants vacant possession). A lease may include language governing the delivery of a Non-Disturbance Agreement and the landlord’s obligations, if any, in obtaining same from its lenders.

While obtaining the foregoing deliverables on or prior to closing is often a matter of negotiation between the parties to asset purchase and sale transactions, the benefits to a purchaser (and risks in not obtaining) should not be ignored. As a practical consideration, when there are a large number of leases being assigned/assumed, parties may sometimes agree to limit all or some of the requests to the most material locations to the seller’s business operations or those locations of particular interest to the purchaser.