Nysba Fall 2006 | Vol

NYSBA FALL 2006 | VOL. 34 | NO. 2 N.Y. Real Property Law Journal A publication of the Real Property Law Section of the New York State Bar Association LLakeake GGeorgeeorge SSiteite ooff tthehe 22006006 SSummerummer MMeetingeeting Inside How Assignment Restrictions in Leases Apply to Real Property Transfer Tax and Mortgage Tax Traps in Corporate Transactions ........................................................................54 Conveyance of Condominium Units in New York City ..................89 (Joshua Stein) (Yosi (Joe) Benlevi) Nonprimary-Residence Holdover Proceedings ...............................63 RPLS Task Force on Attorney Escrows Current Practice, (Gerald Lebovits and Matthias W. Li) Alternatives and Improvements ...........................................................93 Roommates in New York Law ............................................................73 Model Bank Escrow Deposit Agreement .............................................98 (Gerald Lebovits) Extension of Reduced Real Estate Transfer Tax Rate for Subletting in New York Law ...............................................................79 Real Estate Investment Trusts .............................................................106 (Gerald Lebovits) BERGMAN ON MORTGAGE FORECLOSURES: Scenes from the Summer Meeting ......................................................81 Forgetting Assignment Proves Fatal ..................................................109 (Bruce J. Bergman) realprop-newsl-fall06.indd 1 11/21/2006 9:23:29 AM How Assignment Restrictions in Leases Apply to Corporate Transactions By Joshua Stein I. Introduction Starting from those general principles, these defi ned In any corporate merger, acquisition, or other change terms will apply throughout the discussion: in ownership, the target company’s space leases1 will • “Basic Assignment Restriction” refers to an or- often prohibit2 assignment and potentially other similar dinary generic provision in a lease that generally transactions. These restrictions may create issues for and prohibits a lease assignment (or requires landlord impede a corporate transaction. In extreme cases, they consent for such an assignment). Any such restric- may entirely prevent a transaction from closing. Whether tion does not single out particular types of assign- any of these problems arise will depend primarily on the ments or specify other types of transfers that are exact words of the leases and what those words mean. prohibited. It merely says the tenant may not assign Therefore, if a target company holds important the lease. leases,3 the assignment restrictions in those leases may re- • “Advanced Assignment Restriction” refers to quire substantial and very focused early attention in due provisions in a lease that prohibit particular types diligence and contract negotiations. And any participant of assignments. For example, restrictions on the in a corporate transaction of this type will care very much transfer of control of a corporation or assignments about the answers to these questions:4 “by operation of law”9 are Advanced Assignment • What should counsel look for when reviewing as- Restrictions. signment restrictions in space leases? • “Assignment Restriction” refers to Basic • What do the more common assignment restrictions Assignment Restrictions and Advanced Assignment mean? Restrictions together. • How do assignment restrictions affect mergers or • “Subletting Restriction” refers to an ordinary ge- other particular types of corporate transaction? neric provision that generally prohibits all subletting of all or part of the leased property without • Do similar principles apply to restrictions on sub- landlord consent. letting?5 • “Transfer Restriction” refers to Assignment This article tries to answer those questions. After Restrictions and Subletting Restrictions together. summarizing the basic legal principles that govern this This article addresses the following four issues of law area, this article defi nes some important categories, then 10 analyzes how courts treat certain transfer restrictions that and reaches the conclusions summarized below. For any commonly appear in space leases. individual transaction, of course, the conclusions in this article will need to be confi rmed, taking into account the This article considers both New York law and general specifi c facts, circumstances, and leasing documents at American “common law” principles. It also discusses issue. whether a landlord must be reasonable when giving or denying consent to an assignment or sublease (if the lease A. Stock Transfers requires landlord consent to a particular transaction), Q: Do Basic Assignment Restrictions prohibit stock and, if so, what “reasonable” means. transfers of a corporate tenant? II. Overview and Some Defi nitions A: No, unless the lease contains an Advanced Assignment Restriction that specifi cally prohibits These general common law principles form the basic such transfers. foundation and starting point for the present discussion: • Restraints on Alienation—Restrictions against as- B. Assignments “By Operation of Law” signment and subletting are regarded as restraints Q: Do Basic Assignment Restrictions prohibit assign- on alienation, which the courts generally disfavor. ments “by operation of law”? The courts therefore construe these restrictions A: No. An assignment “by operation of law” will “strictly,” in favor of free alienability.6 not violate the lease unless the lease contains an • Forms of Alienation—A covenant against one form Advanced Assignment Restriction that specifi cally of alienation does not prohibit another form.7 For prohibits such assignments. example, a covenant against assigning does not preclude subletting, pledging, or mortgaging.8 54 NYSBA N.Y. Real Property Law Journal | Fall 2006 | Vol. 34 | No. 2 realprop-newsl-fall06.indd 2 11/21/2006 9:23:46 AM C. Mergers of new stock, the issuance of which is enough to change 18 Q: Do Basic Assignment Restrictions prohibit merg- control of the corporation. Although New York courts ers of a corporate tenant? have not considered Advanced Assignment Restrictions that specifi cally prohibit the transfer of a corporate A: No. A corporate merger will not violate the lease tenant’s stock, one case suggests that such clauses would unless it contains an Advanced Assignment be enforceable under New York law.19 In any event, such Restriction that specifi cally prohibits mergers—ei- restrictions may be of unreliable enforceability or value ther explicitly or as assignments or transfers “by where a corporation has many shareholders. In one operation of law.” case, for example, a court disregarded these restrictions D. Reasonableness in Denying Consent where, when the lease was signed, 40 percent or more of the corporation’s stock was owned by over a dozen Q: If a Transfer Restriction sets no standard for the shareholders.20 landlord’s consent, must the landlord act reason- ably in refusing consent? If so, what standard of If the tenant is a limited liability company (“LLC”), “reasonableness” must the landlord satisfy? but the lease prohibits stock transfers or partnership transfers and says nothing about transfers of LLC mem- A: Only a minority of jurisdictions require landlords bership interests, the courts would probably allow a to be reasonable. Even where the courts require transfer of the LLC interests. Courts dislike Assignment it, no single standard defi nes “reasonableness.” Restrictions and will construe them strictly. Therefore, The cases, and there are many of them, offer some courts would probably say that if the landlord wanted clues. to prohibit transfer of LLC interests, the landlord should Important Note: While the above answers represent have said so in the lease. majority viewpoints, there are exceptions and minor- IV. Assignments by “Operation of Law” ity viewpoints (some of which amount to “emerging trends”) relating to most of the above issues. Moreover, Many commercial leases prohibit assignments by any individual judge can usually fi nd some basis to de- “operation of law.” To understand these restrictions, cide any particular case in whatever way the judge sees one must fi rst defi ne an assignment by “operation of fi t. Any potential participant in a transaction should law.” Black’s Law Dictionary defi nes “operation of law” as therefore consult current case law in each applicable ju- follows: risdiction. Moreover, in negotiating leases and corporate The manner in which rights, and some- transactional documents, the parties should not leave times liabilities, devolve upon a person these issues for a court to decide. by the mere application to the particular III. Stock Transfers transaction of the established rules of law, without the act or cooperation of the Under general legal principles, the sale or transfer party himself.21 of a corporate tenant’s stock does not violate a Basic Assignment Restriction.11 This is because a corporation The means by which a right or a liability is created for a party regardless of the exists separately from its stockholders. Thus, while the 22 owners of a corporation may transfer the company’s party’s actual intent. stock, this does not change the actual tenant under the “Operation of law” thus refers to the transfer of rights lease, which was, is, and remains exactly the same cor- or liabilities by court order, statute, or the like—as op- poration.12 Courts have applied this rule even where a posed to a voluntary and express transfer made by a par- landlord has previously disapproved a proposed

Load more