What's Wrong With This Picture?
We (the Lessee) anticipate selling our assets to WXYZ CORP (together, "Transferee"). In connection with the Agreement, we intend to assign all of its right, title and interest in the Lease to Transferee and, concurrent with such assignment, Transferee will assume our obligations under the Lease (such assignment and assumption, the "Assignment"). With this letter, we are seeking your consent to the Assignment.
By signing and returning this letter, you (Lessor) (a) consent to the Assignment, (b) agree that the Assignment shall not constitute a breach of, or give rise to or accelerate any rights under, any provision of the Lease, (c) acknowledge that the Lease will continue in full force and effect following the Assignment, and (d) agree that any notice requirement relating to the Assignment is satisfied or hereby waived."
So what's wrong with this request for consent to assignment that one of our clients actually received (more or less the same language)? "What's wrong this picture?" Remember those games? One of the palace guards is wearing his hat upside down or something. My kids loved it. So, what is wrong with this picture?
Lessee is selling its business to Transferee. This may be a default under the Lease or EFA ("sale of substantially all assets"). Whether it is or not, Lessee must assign the Lease or EFA to the Transferee. This certainly should be a default. In fact, we don't like "consent not unreasonably withheld" where assignments are involved. Maybe subleases (depends on lessee credit AND nature of the equipment, among other things).
Assignments are different and are almost always combined with a request for the release of the original Lessee. Generally speaking, an assignment does not automatically release the original Lessee, although (unlike a sublease), it is more than a transfer of mere possession of the Equipment.
Many Lessors sign letters like this without much thought. After all, it says that the Transferee is assuming the original Lessee's obligations, right?
Here are a few of the things the letter does
- It should be clear that Transferee's assumption of the obligations commences on the date of the closing and whether those obligations include anything existing on that date (such as unpaid rent, property taxes for the period since the last assessment, etc).
- Although we might argue it is presumed, it should be clear whether the original Lessee is released for future obligations and more importantly, with regard to the existing obligations described in item 1.
- It is nice that the original Lessee is saying that the Transferee is assuming obligations, but Lessor is not provided a copy of the assignment/assumption document. The Transferee should, in consideration of the grant of consent, also sign this letter (with changes) or a document delivered to Lessor before the consent is given stating that the Transferee assumes the obligations for the benefit of Lessor.
- We like to see the original Lessee represent that it is not in default and the Transferee state that, at least to its knowledge, neither the original Lessee nor Lessor is in default under the Lease.
- Where is Transferee's contact information? Is an ACH set up?
- Can the Lessor draw credit information on the Transferee before consenting?
There are more things that, at least in a larger transaction, we would like to see, but what else do you think is missing? Good topic for internal discussion. Another good topic: What is your policy and procedure on these matters? Lessors have gotten in trouble where the first person answers "sure we will consent" and the boss later adds "if you pay a transfer fee."