Don't Let Tenant Merger Escape Assignment Clause

Renting office space to a corporate tenant requires some special handling of the typical assignment clause in a lease. Usually, an assignment clause requires the owner’s consent before the tenant may assign the lease. A corporate tenant may try to get around this by simply transferring their stock to the intended assignee. That is why smart owners insist on treating a major change in the tenant’s ownership as an assignment. Many corporate leases, for example, state in the assignment clause that a change in ownership of half or more of the tenant’s stock will be treated as an assignment.

Unfortunately, that kind of lease language has a loophole. True, the language can help owners in many situations and should appear in a well-drafted clause. But it won’t aid an owner if the tenant is a wholly owned subsidiary of another corporation and the subsidiary and its parent company merge. The end result is akin to an assignment: The parent corporation is now the tenant. But the typical assignment clause gives the owner no right to object to this transaction, since no change in ownership has taken place.

What difference does a merger make? When a subsidiary merges with a parent corporation, substantial changes may take place. Management and executive personnel may change completely. Suddenly the property owner has to deal with complete strangers instead of the business people with whom it had an ongoing relationship. Even more disturbing, the parent company’s finances may be weaker than the original tenant’s. The parent company may have liabilities and credit problems that the subsidiary did not have.

One way to plug this loophole is to simply say in the assignment clause that “the merger or consolidation of Tenant with any other corporation or business entity” is to be “deemed an assignment of this Lease and shall be subject to all of the provisions of this Article, including, without limitation, the requirement that Tenant obtain Landlord’s prior written consent thereto.”

Including this language in the lease, along with language requiring consent for a change in ownership, will prevent the tenant from getting around the assignment clause. If it merges with its parent corporation, it must first get the owner’s written consent, and the owner does not have to passively accept the parent corporation as its new tenant.