Leases: The Takeover Lease
by David Tevlin
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 ground 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 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 take-over 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 take-over 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 this to be done without the consent of the first landlord.) If the take-over 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.
For more information, please contact our Real Estate and Construction Group at 440-449-6800.
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