M&A Monday: The Landlord Holds a Veto Card

Most do not realize, in an M&A deal, the landlord often has a veto right over your deal.

Landlords often can hold up an M&A deal and squeeze concessions out of buyers and sellers.

Last month I had a deal that was in Month 6 of a 60-day closing. We sweat over the LOI, then buyer did financial due diligence, legal due diligence and we had to go through a renegotiation of the purchase price. When that was done, we negotiated a purchase agreement, promissory note, consulting agreement, employment agreements, escrow agreement, an investor term sheet, investor operating agreement, and finally the loan documents with a lender. Now, we were ready to move to closing and went to get landlord’s consent to a change of control under the lease and to sign the lender’s Landlord Waiver. Landlord asked for a bunch of information and then, sent us a letter denying our request for their approval.

My client said, can we close over this? What do we do? I said, nope. We must get the landlord to agree or we cannot close the deal.  

Why is this an issue?

The Seller's business almost always has a property and when the seller does not own their own RE, they have a third-party landlord.

The lease that Seller signed back in 2004 says that landlord's consent is required for any assignment of the lease (needed for an asset sale), and often, any change of ownership above 50% is considered an assignment (needed for an equity deal).

This is problematic for a few reasons:

1. The real estate location is usually critical.

2. The lender usually requires certain things from the landlord. For example, a Landlord Waiver allowing lender to enter the premises and take their secured assets, and in SBA deals, a lender also requires a total lease term of ten years (which can include options).

3. Sometimes, seller has a guarantee that they need to be released from.

Landlord usually does not care or respond to the buyer/seller's urgency. They are not motivated to fast-track approval just because we want to close. From landlord's perspective, they want to verify creditworthiness of the new buyer and landlord's lenders may want to do the same.

Thus, buyer and seller can laboriously negotiate an LOI, do diligence, sign a purchase agreement, secure debt, and equity, and be at a standstill negotiating with a landlord on their yacht in Cancun with bad internet.

Also, PE folks are used to dealing with PE folks, but landlords are different creatures; they don't respond to pressure and move at their own pace.

Finally, here is what you may have to give up: higher rent, larger rental increases, buyer personal guarantee on the lease, larger security deposit, and even (wait for it), a percentage of buyer’s revenue above a certain threshold. Landlord will usually charge the buyer a fee for approving the consent.

A couple of tips that seem to work.

1. Get landlord documents well in advance and begin discussions early. While seller can be resistant to this, it must be done.

2. Understand that landlord has the power and get ready to jump through hoops.

If you are a seller with the foresight to negotiate a lease that does not give landlord veto rights over a change of control, negotiate for that at the outset of the lease.

An informed buyer is one better able to navigate a transaction to closing. This is one of those issues that are often missed until it is too late.